Currency World at First Quarter-end 2012

March 30, 2012

From a government perspective, chronic currency appreciation is undesirable.  In the quarter now ending, officials in Japan, China, and Switzerland did their utmost to keep a lid on the yen, yuan, and franc.  A drop in the yen of more than 6% against the dollar helped lift Japan’s Nikkei-225 by 19.3% in the quarter, some 2-1/2 times greater than the touted rise of the Dow.  A Chinese policy of managed appreciation, as in 2008-10, was suspended in reaction to that economy’s slowdown.  Accordingly, the yuan stagnated in 1Q and rose only 4.0% from the end of March 2011.  Swiss monetary authorities, like their Japanese counterparts, fear imported deflation.  They continued to subordinate domestic monetary policy to the goal of preventing the franc from strengthening past 1.2000 francs per euro.  The mission has not been defended easily.  The franc since the end of 2011 has risen about 0.75% against the euro and is currently near to the central bank’s line in the sand.

U.S. governments of both the left and the right over the past 40 years have been accused of benignly neglecting the dollar.  The charge is a fair one.  From end-March 1971 to end-March 1981, the dollar depreciated 5.3% per annum against the mark and at a 5.1% annualized rate against the yen.  During the following decade to end-March 1981, the dollar dropped almost twice as quickly against the yen (4.0% per annum) as the mark (2.2% per year).  The next ten years to end-March 2001 included the often espoused strong-dollar goal of former Treasury Secretary Rubin.  Although rising by 2.6% per annum against the synthetic mark and euro, further dollar depreciation of 1.1% per year occurred against the yen.  That decade’s greater dollar resilience did not extend to the ten years between the March-ends of 2001 and 2011 when the greenback slumped by 4.6% per year against the euro and 4.0% per year versus the yen.  Over the last twelve months, the dollar slid 1.2% against the yen in spite of its sharp rebound in the first quarter of 2012.  Against the euro, the U.S. currency advanced some 6% over the past year but fell about 3% during the past quarter.

The dollar enjoys a number of supports against the euro, which is the best bilateral currency barometer of general sentiment toward the U.S. currency. 

  • During the past quarter, U.S. 10-year Treasury yields have risen 27 basis points, while bund yields edged three basis points lower.
  • The euro debt crisis isn’t over.  Peripheral eurozone sovereign debt experienced intensifying strain late in March.  Another Greek moment of truth before mid-2012 seems reasonably plausible.
  • The U.S. is experiencing decent growth at the moment in contrast to Europe where GDP at best stagnated this past quarter.  The OECD projects that U.S. GDP should expand at close to 3.0% in 1Q12 and 2Q12.  Collective growth in Germany, France, and Italy, by contrast, is seen falling 0.4% in the quarter just ending and recovering at a 0.9% annualized rate in the second quarter.
  • The Fed continues to restrain itself from implementing a third round of balance sheet-expanding quantitative easing. 

These near-term dollar strengths must, however, be balanced against some longer term vulnerabilities.   Promoting growth and raising inflation remain Federal Reserve biases. New actions at or shortly after mid-year to stimulate U.S. growth cannot be ruled out.  The U.S. current account deficit is again widening, having jumped 15% to an annualized rate of nearly $500 billion in the fourth quarter.  The value of the dollar foremost reflects a sense of America’s present value as a global military, economic, and cultural leader, which are being questioned lately in ways not imagined during the 20th century. 

Some more immediate and tangible factors will be moving into the spotlight next quarter.  Among dollar negatives, expected inflation could climb higher especially if oil price pressures intensify.  The presidential election campaign will accentuate the problems of Washington’s deficit, political gridlock, and overall dysfunctionality.  First-quarter corporate earnings to be reported over coming months will likely be disappointing and could put downward pressure on business confidence and U.S. equities.  One countervailing positive is that while 1Q12 brought some resolution to Europe’s debt crisis, the second quarter will probably see the pendulum swing the other way.  French presidential elections on April 22 and May 6 could be a catalyst for intensifying trouble. 

Historically, April has been a good month for the yen.  Being the start of the fiscal year when resident investors presumably redeploy wealth overseas, the notion of yen appreciation now is not intuitive, but the facts are what they are.  As far back as 1980, the yen in early April bottomed at 264 per dollar, over 9.0% below its end-1979 level, but reversed direction and closed the year at 202.9 per dollar.  From 1989 to 2006, the yen lost 1.0% or more in April against the dollar just 3 of 18 times, and that run of good performances included a 3.4% advance in April 2006.  In 2007, a fourth exception occurred with the yen losing 1.4% against the greenback in April, and this was followed by a 4.0% decline in April 2008 and two insignificant dips of 0.2% in April 2009 and 0.5% in April 2010.  April 2011 saw the yen climb in April against the dollar for the first time in five year, but the 2.6% magnitude of the gain is a reminder that the earlier pattern of yen fortitude in April may not have disappeared after all.

Sterling has been shadowing the euro more closely than generally used to be the case.  Against the dollar, the pound and common currency rose around 0.7% and 0.6% in the final week of 1Q and by some 2.9% and 3.1% in the quarter as a whole.  Britain, like Euroland, is in a state either of recession or near-recession even as more fiscal restraint lies ahead. 

Australia is heavily influenced by China’s business cycle.  Speculation that China may experience a harder landing than sought in this critical political year from China weighted on the Aussie dollar this past week and quarter.  In 1Q, the currency advanced just 1.3% against the greenback compared to a 5.5% advance by the New Zealand dollar.  Compared to their values a year ago, the Aussie dollar is only marginally changed, whereas the kiwi has recovered over 7% against the U.S. dollar. 

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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