U.S. Currency Generally Buoyant in Spite of Loss against Euro

September 26, 2013

The dollar’s performance in 2013 has been a mixed one.  Quarter-end is nearly upon us, and the currency is 3.5% below its mid-2013 level against the eurol.  Compared to end-2012, the European common currency has risen slightly more than 2.0%, and the euro’s advance since hitting a low in 2012 of $1.2041 equals roughly 12%.  The dollar has also fallen marginally on balance this year against the Swiss franc, New Zealand kiwi, and Chinese yuan.  At the same time there is a wide number of emerging market currencies against which the dollar has appreciated by 10% or more in 2013.  A big gain of 14% relative to the Japanese yen and moderate appreciation versus the Canadian dollar and sterling have occurred, too.  The diversity of dollar movement makes characterization of the dollar difficult.  On balance, the currency’s cup seems more full than empty.

The dollar is carrying several pieces of negative baggage, but problems elsewhere hinder the ability of other industrial currencies to rise.  Dollar drags include a dysfunctional congress, a weak and indecisive executive branch, confusing monetary policy and the poorly managed transition of Fed chair-person, and the U.S. current account deficit.  The yen, which plunged about 20% rather quickly around the turn of 2012/13, has been stalled for several months just over the strong side of 100/USD.  One roadblock is that U.S. politicians in congress are again accusing Japan’s government of manipulating the yen.  Another is faster economic growth lately in Japan than other developed economies including the United States.  Euroland’s year-and-a-half-long recession ended at midyear but the operative adjectives of the nascent recovery are modest and vulnerable.  Monetary policy in the region will be biased toward ease for longer than in the United States. 

Taking the long view, Euroland continues to be plagued by the absence of a credible plan for widely shared socially acceptable growth.  Euro bears were burned betting that a collapse of the common currency was imminent, but unless the have countries like Germany agree to much greater give-and-take, the error in the logic of the euro bears will be one of timing only.  The have-not nations like Greece have already stretched austerity as far as socially imaginable.

A great deal of anxiety continues to surround the economic outlook of China, where GDP growth has already decelerated from 11.8% in the four quarters through 1Q10 to an annualized pace of roughly 7.0% during the first half of 2013.  The fear is that growth might sink below 7% next year, even as other once-buoyant emerging economies also struggle.  Growth over the last reported year amounted to 3.3% in Brazil, 2.0% in South Africa, 1.5% in Mexico, 4.4% in India and Turkey, 2.3% in South Korea, 2.5% in Taiwan, 2.6% in Thailand, and 3.8% in Singapore.  Export demand from developing economies provided a key impulse for the immediate recovery of industrialized economies following the 2008-09 Great Recession.  That support is now missing, and this will blunt any benefit to exports from currency depreciation.

China’s growing pains relate to efforts to transform investment- and export-driven economic growth into an expansion oriented around faster household consumption.  This metamorphosis has been expected to benefit New Zealand more than Australia because of the difference between those economies’ commodity export baskets.  The question now is whether the kiwi’s significant appreciation this year already embodies this factor to the fullest, if not more so than it should.  If the latter, the Aussie dollar might be poised to recoup part of this year’s losses even in the likely event that New Zealand interest rates rise relative to Australian levels. 

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

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