Doldrums for Dollar Watchers

April 25, 2013

It’s been another uneventful statement week for key dollar exchange rates.  The Canadian and Australian currencies remain boringly close to parity with the greenback.  The waiting game goes on for the euro, which has averaged $1.3154 thus far in 2013, to break decisively away from $1.3000.  The euro, Swiss franc, sterling, Aussie dollar, Chinese renminbi, and Canadian dollar are each 1.5% or less distant from their year-to-date means.  The kiwi’s separation is less than 2% from its central tendency.  Sterling made a nice 1.0% upward move versus the dollar over the past week, substantially trimming one of the few major dollar relationships to exhibit cumulative movement earlier this year

In that latter regard, dollar/yen sticks out, but Japan’s currency has stalled just shy of 100 per dollar even though G20 central bankers and finance ministers exonerated Prime Minister Abe’s government from any blame as a currency manipulator.  That Group of peers said Japanese officials are merely doing what needs to be done given Japan’s chronic deflation, anemic money and lending growth, and lack of nominal GDP expansion.  Meaningful capital outflows from Japan have not yet emerged and weekly net flows of stock and bond transactions continue to be inward in direction. 

Besides the G20’s non-sanction against yen policy, the dollar has been largely unaffected by other potential market-moving shocks. 

  • An eventual weakening of the euro seems unavoidable.  Euroland’s banking system is much more fragile than those in Japan and the United States.  The euro remains intact because of the will to keep it so of the politicians, who haven’t found a way to restore competitiveness to the union’s troubled members.  The euro area is still in recession, and its main engine, Germany, is sputtering anew.  An interest rate cut by the ECB in early May is widely expected.
  • The United States experienced its greatest act of brazen terrorism since September 2001 earlier this month.  The quick ability to hunt down the perpetrators was impressive, but the decentralized nature of the deed proved hard to detect in advance.  Unless effective adjustments in home security are devised, other successful breaches could follow.  Make no mistake, 911 was an event contributing to an enduring slowdown in the “normal” trend rate of U.S. growth.  A mutated more frequent form of what 911 started would deliver a new blow to America’s trend rate of growth.
  • Other financial markets have experienced considerably greater cumulative change than the dollar in 2013.  Wide disparities exist between the year-to-date share price advances of 34% in Japan’s Nikkei, 13% in the DOW, 9% in the Ftse and 3% in the Dax.  Gold, which often trades inversely with the dollar, has slumped sharply.
  • Public confidence has waned in democratically elected political leadership.

One possible explanation for the dollar’s inertia is the absence of great contrast in the economic fundamentals of the wealthier economies.  Most importantly, inflation differentials are comparatively narrow.  The multi-percentage point inflation spreads between Germany, Japan, and Switzerland on the one hand and the United States and Britain was a huge driver of dollar depreciation in the 1970s, 1980s and early 1990s.  Current account disparities are less stark now, too.  And macroeconomic policies are currently pretty synchronized with everyone pursing accommodative monetary policy and grappling with excessive budget imbalances.

Structural changes in foreign exchange trading has also likely played some role in dampening cumulative swings in the dollar.  The environment of saavy interbank traders quoting bid-offered currency spreads has given way to computer driven trading.  An underbelly of on-line day traders didn’t exist back in the day, nor the vast support system of information from business TV and radio, not to mention the myriad of trading schools and platforms offered on the internet.  This proliferation of market commentary providers, much at no cost to the user, is a sign of a weak labor market.  The temptation is great for frustrated conventional job seekers to try their skill at currency trading that can be done with ease right out of the home.  Paradoxically, the rapid expansion of easily accessible currency market advice and trading systems has been accompanied by smaller cumulative dollar swings.  These tend to offer more lucrative profit opportunities that the choppy nature of price action that one sees lately.

It is possible, too, that the much higher sheer volume of currency trading has promoted narrower swings in the dollar.   Gross foreign exchange turnover averaged $5 billion in the United States per business day in April 1977.  The global daily turnover in April 2010 was about $4 trillion.  A change so great is bound to impact the nature of the activity and the output of various aspects of that activity including the propensity for large unidirectional swings in the external value of the dollar.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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