New Overnight Developments Abroad: Dollar Hits Multi-Month Lows
May 22, 2009
Market chatter is full of talk about a new paradigm in which dollar, stocks, and bonds fall in tandem on frustration about massive U.S. deficit spending amid continuing weak economic growth. Boston Fed President Rosengren made downbeat remarks about a possible U.S. recovery. Bernanke gives a commencement address today at the BC law school.
Euribor rates again ticked higher.
The dollar hit 7-month lows of 0.7822 per Aussie dollar, 0.6188 per New Zealand dollar, and 1.1295 per Canadian dollar as well as a 4-month low of 1.3978 per euro. Lowest value (Chf 1.0872) against the Swiss franc since January. From close on Thursday, the dollar is down 1.3% against the kiwi, off 0.5% against the Canadian dollar, euro, and Australian dollar, -0.4% relative to the Swissy, and down 0.2% versus the yen. U.S. situation is being compared to Britain’s, and dollar/sterling is unchanged.
Stocks fell in Asia: Japan off 0.4%. South Korea down 1.7%. Vietnam -1.9%. China -0.3%. But European bourses have recovered 1.1% in Germany, 0.9% in France and 0.6% in Britain.
Oil firmed 0.8% to $61.52/barrel amid escalating conflict in Nigeria. Gold edged 0.1% higher and remains somewhat above $950/ounce.
U.S. Treasury market to close early today ahead of Memorial Day weekend. British markets will also be shut on Monday.
The Bank of Japan expanded eligible collateral to sovereign debt of Germany, U.S., Britain and France but left its key rate unchanged at 0.1%. Since Lehman’s failure, the BOJ has cut the overnight target just twice, by 20 bps each on October 31 and December 19. The BOJ upgraded its assessment from “deteriorating sharply” to “deteriorating but exports and industrial production are leveling out.” Such is the first upgrade in three years, but officials say that uncertainty associated with outlook has not lessened. BOJ voting was unanimous.
The second estimate of British growth last quarter did not revise the first estimate of a quarterly GDP drop of 1.9% and an on-year plunge of 4.1%. Exports, investment, and consumption respectively decreased by 6.1%, 3.8%, and 1.2% between 4Q and 1Q, and there was a record decline in inventories that accounted for 0.6 percentage points of the 1.9% decline of GDP.
The central bank in Azerbaijan cut its key interest rate by 100 basis points to 2%. There had been an earlier 200-bp cut in March.
The central bank in Serbia left its 2-week repo rate unchanged at 14% but relaxed reserve requirement standards.
The Greek current account deficits were 24.0% and 22.2% smaller than a year earlier in March and the first quarter.
Italian retail sales firmed 0.1% in March but posted a larger 5.2% on-year drop after falling 4.7% in the year to February.
No major U.S. releases today. Canadian retail sales are due at 12:30 GMT.
Copyright 2009 Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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Interesting piece…I’ve been following the site frequently now for the past few months.
I’m curious as to what your thoughts are as to where capital will go if the “market chatter…new paradigm” holds true?
And what, if any, affect is there on commodities and how to price them?
Nicolai- Your questions do not lend themselves to short answers, but let me throw out a few observations. First, a sustained rise in Treasury yields and drop in the dollar on fiscal worries will need to be justified by rising and higher-than-anticipated U.S. inflation. A post in the Currency Thoughts archives from May 4 (Keynes or Friedman: A Never-Ending Debate) documents the insidious and long run-up of the deterioration of price stability prior to the stagflation of the late-1970’s and observes no similarity in that pattern to contemporary trends. Secondly, other precedents to this global Great Recession (the 1930’s and Japan since 1991) were associated with deflation and low long-term rates. Thirdly, I take a dim view of long-term dollar prospects based on the currency’s record of long-term erosion since the 1960’s and the need for a more competitive exchange rate to drive the U.S. trade deficit even lower. Fourth, capital flows and exchange rates are co-determined in the marketplace, so one doesn’t need ever-rising capital outflows to produce a depreciating dollar. Fact is, the U.S. has attracted massive capital inflows even as the dollar was falling. Fifth, there will be more diversification of reserve asset portfolios away from the dollar in coming decades. The euro and eventually the renminbi are likely to be held in increasing weights in international portfolios as we move more deeply into the 21st century. Finally an anecdotal observation on oil prices. Crude is presently priced at just over 40% of its peak in July 2008, but for gasoline yesterday I paid 65% of the top price I saw last summer. Point is that petrol costs are pricer that the impression one gets from the trend in crude oil. In combination with rising long-term interest rates, a very weak labor market, and stock prices that are again looking vulnerable, it’s possible that economic recovery may get postponed further.