Weekly Foreign Exchange Insights: November 13th
November 13, 2009
Autumn can be a risky season for the dollar, and officials all over are conspicuously throttling down currency market rhetoric. At this nascent point in the global upswing, a full-blown currency crisis would be unhelpful, and it’s best to let sleeping giants lay. Business press attention to the dollar has lately been greater than the authorities probably would like. Treasury Secretary Geithner repeated this week obligatory remarks that “it’s very important that the United States maintain a strong dollar,” and Chinese officials retained the view that a more flexible exchange rate remains a long term-goal. Neither remark signals a near-term currency policy change, but both reduce the chance that speculators will pounce upon a perceived currency war. At the APEC meetings in Singapore, praise for China as a global recovery driver drowned out criticism of the yuan’s peg to the dollar. Likewise, the Fed’s quarterly report on currency market conditions and official FX operations covering the summer quadrant depicted an orderly downward adjustment of the dollar justified by a natural “reallocation” of capital by U.S. and international investors in response to recovering risk appetite and to a perception “that economic conditions in overseas markets were recovering at a somewhat faster pace than in the United States.” The report does not imply that dollar declines have been excessive and stresses that its sharpest losses came at the expense of currencies with “close links to global trade and the commodity cycle.”
In the third quarter, the dollar had lost more than 10% against the kiwi and Norwegian krone and over 5% against the currencies of Sweden, Brazil, Poland, Australia, Canada, South Korea and Japan. Each of these movements exceeded the dollars losses against the euro and Swissy. The Fed’s report confirms that the United States had not intervened, extending the interval with no such activity to nine years, a record in the floating exchange rate era. Note is made, however, that several central banks in emerging economies had intervened, some quite extensively.
Officials are correct to deny a currency crisis. It doesn’t fit the parameters one would expect. If markets want to believe otherwise, investors need to walk the talk. Dollar depreciation has not spawned undesirable strains in stock, bond, or money markets. The dollar’s eroded value did not prevent recoveries from returning to Europe and Japan. Although U.S. import prices have picked up with gains in October of 0.7% overall and 0.4% for prices on non-fuel imports, deflationary risks still outweigh inflationary ones. Finally, the dollar has not dropped as sharply against its chief rivals as has in the past. From the dollar’s 2009 highs, it had declined as of 15:30 GMT today by 18.8% against sterling, 16.1% against the euro, 15.1% against the Swissy, and 11.6% against the yen.
- When a broad dollar rescue package was unveiled on November 1, 1978, the greenback was showing a 27.8% year-to-date drop against the mark.
- From peak levels in February 1985, the dollar by yearend had lost 29.5% against the mark and 24.2% against the yen.
- At its lows in March-April 1995, the dollar had fallen by 23.4% against the mark and 29.7% against the yen from its 1994 highs.
- From 2002 highs to late-2004 lows, the dollar plummeted 37.3% against the euro and 24.7% against the yen.
As noted in the Fed’s report, some of the biggest dollar losses have been against commodity-sensitive currencies. Canadian and New Zealand officials have repeatedly called the dollar’s respective declines against their currencies of 19.4% and 33.5% from 2009 highs too deep, inappropriate for existing economic trends and prospects, and a potential big negative factor facing their economies. Australian officials have taken a different path, observing a brisker-than-expected recovery, anticipating more of the same, and getting out front of other central banks in raising interest rates even though doing so is likely to reinforce the Aussie dollar’s bid tone.
The U.S. October labor report was weaker than hoped, just as the September figures had been. It is widely felt that the unemployment rate will play a pivotal role in the timing of the Fed’s exit strategy, with any rate increase unthinkable before the clear establishment of a downward trend in joblessness. Private forecasts of the earliest timing remain anchored at very late in 2010, and officials are doing nothing to dissuade such notions. In combination with Congressional efforts to strip the Fed of some power, the ingredients for an intensifying rout of the dollar seem in place, but markets so far are not inclined to take the bait. At 15:30 GMT, the dollar showed no net change for the week against the euro, compared to a 1.0% drop recorded in the week after the September labor market figures were released on October 2nd. The dollar this week had performed worse than in the week of October 9th against sterling (off 0.2% versus up 0.7%) and the yen (down 0.3% versus no change), but its drops of 1.5% against the Aussie dollar, 1.6% against the kiwi, and 2.2% against the Canadian dollar were not as severe as those of 4.3%, 2.4% , or 3.3% in the week of October 9th.
Oftentimes, it’s not the news but the markets’ reaction to the news that provides the most useful information about where currencies might be heading. Just because officials imply things are manageable, investors don’t have to accept the fact, but markets do not seem to be in a mood this time to challenge the status quo vigorously. It would be a huge surprise if the yuan’s cap were lifted within three months, and U.S., Japanese, and European central banks seem very predisposed to leaving the intervention tool in the closet. The fundamentals that began depressing the dollar early in 2009 remain in place; only the dollar’s levels have changed. But markets are handling the key dollar relationships very carefully, with support looking pretty solid at $1.50 and in the vicinity of Y 90. I would expect the Canadian dollar to encounter mounting resistance the nearer it moves to parity, and the kiwi and Aussie dollar have yet to prove that they can sustain moves to the 75 cents and 95 cents against their U.S. counterpart.
A final note to bear in mind is the approaching yearend period. The week after next contains the U.S. Thanksgiving holiday and will usher in the annual tradition of partying and shopping. It’s a great time to take the pulse of the U.S. and other economies, but it’s also a time of thinning trading volume because books shut down and traders take days off. The dollar historically has exhibited a negative tendency around this time of year.
Copyright Larry Greenberg 2009. All rights reserved. No secondary distribution without express permission.
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