Dollar in Two-Day Plunge

December 17, 2008

From highs on Monday to lows today (Wednesday), the dollar fell 8.9% against the Swiss franc, 8.8% against the New Zealand dollar, 7.4% against the euro, 6.2% against the Australian dollar, 5.1% relative to sterling, 4.6% versus the yen and 4.3% against the Canadian dollar. These moves drive another nail into the dollar rise of 2008. At first the appreciating U.S. currency looked like a corrective rise within a long-term downtrend. But as the dollar recovery exceeded the typical duration of a correction and given the large magnitude of the dollar’s gains, which stretched to over 60% against the Australian currency, more than 40% relative to sterling and the Canadian dollar, 30% against the euro and almost that much against the Swiss franc, the respite no longer resembled the profile of previous “corrections.” The red herring in the picture was the non-participation of dollar/yen. The yen kept grinding higher and now shows a trough to peak move of 42.4% from late June 2007.

If a multiyear dollar uptrend had been indeed under way earlier this year, its recent relapse into falling mode has begun very early. The free-falling nature of the dollar this week and the monetary policy backdrop moreover suggest that the price action is not merely the first downward correction in an otherwise prolonged dollar upswing. Maybe, the dollar had in fact been ripe for a major reversal when its rise began. But if so, enough seems to have changed to tear up that script.



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