Comments on the Dollar’s Performance in the First Quarter

March 31, 2015

The dollar’s rise this quarter against the euro was historic.  Appreciation at this writing stands at 12.6%, which is a larger move, up or down, than in any other first quarter since the euro was created at the start of 1999.  The past quarter’s gain represents four-fifths of the $1.3993 to $1.2097 high-low spread in all of 2014.  Prior to 1999, the Deutche mark was Continental Europe’s hegemon currency prior to 1999, and only three first quarters since 1977 had comparable moves against the mark to this past quarter.  The dollar advanced 13.9% in the first quarter of 1991, boosted by the successful Gulf War, and 12.6% in the first quarter of 1980, buoyed by the Fed’s adoption of quantitative tightening in October 1979.  It also fell by 12.6% in the first quarter of 1995, setting its an all-time low against Germany’s money. 

It’s not hard explain the euro’s weakness at the start of 2015.  Fed preparations intensified for interest rate normalization later this year, even as the European Central Bank launched quantitative easing six years later than the Fed had.  Switzerland stunned the market in mid-January by removing a ceiling on the franc/euro cross and source of heaving selling pressure on the euro.  Russia’s provocative policies in Ukraine and Greek elections in January generated fresh doubts about the future of NATO and the European Monetary System.  Just as yen depreciation had been a centerpiece of Abenomics, investors deduced that by design or the force of circumstances, vigilance against deflation in the eurozone would inevitably weaken the euro.

The yen, in sharp contrast to the euro, is currently trading exceeding close to its end-dollar level of 119.7.  Dollar/yen had actually experienced a wider high-low trading range in 2014 than had EUR/USD.  From as strong as 100.73, the yen had fallen to as weak as 121.85 during the year.  But during the first quarter of 2015, a rift seemed to develop between the Abe Government’s view toward the yen and the Bank of Japan’s.  Government officials became sensitive to the plight of households, whose disposable income could be squeezed by import price inflation in excess of rising wages. 

The Swiss franc was one of the few currencies to appreciate against the dollar, and the Chinese yuan will close with minimal net change like the yen.  The dollar is at present down 2.3% against the franc because of the pent-up demand for the Swiss money that was unleashed when Swiss authorities withdrew unlimited intervention to prevent appreciation beyond 1.2000 francs per euro.  Regarding the yuan, prospects seem increasingly downward in direction as Beijing authorities take further steps to limit any shortfall in growth below the target of 7%.

Sterling also faired comparatively well against the dollar in the first quarter of 2015, losing less than half as much against the dollar as did the euro.  It is common from cable (that is the pound’s value against the dollar) to trade in the same direction as the euro but with significantly less amplitude.  Also, British growth last year had surpassed euro area growth.  Looking forward, the second quarter could pose special challenges for sterling.  Opinion polls suggest that the May 7 election could produce a hung parliament with the Tories taking a significantly smaller plurality of parliamentary seats than won in 2010.  Chancellor of the Exchequer Osborne’s pre-election budget was transparently inspired by political motives, and the Bank of England has been waffling on its forward guidance about when rate normalization might begin.  Even worse, the BOE’s Governor and the bank’s chief economist do not seems to be quite on the same policy page. 

In a quarter that saw West Texas Intermediate oil prices sink another 10% or so on balance, commodity-sensitive currencies as a group did poorly against the U.S. currency.  Year-to-date appreciation in the buck ranges from 9% in the loonie to 7% in the Aussie dollar and 4% for the kiwi.  Canada is a net energy exporter.  The last four official cash rate changes by the  Reserve Bank of New Zealand were increases, all in 2014, whereas the Reserve Bank of Australia surprised markets with a 25-basis point cut in February 2015.  Central bankers in both countries complain about overvalued currencies, and this past month’s policy meeting in New Zealand removed the bias toward future interest rate hikes. 

Over the course of the first quarter of 2015, the trade-weighted dollar rose about 7% against other currencies that circulate broadly in markets, gained about 1.5% against ones that are not market determined, and advanced around 4% against a basket of all trading partners. 

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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