Administrative Notice

June 4, 2009

Reporting on this site through Tuesday, June 9 will be light and Foreign Exchange Insights will not appear until June 12th. 

In the meantime, a currency market development that bears watching is the negative economic effects of any further and steepening depreciation of the dollar.  The widely accepted explanation for the yen’s 9.5% retreat from a high of 87.15 per dollar last January is lessening risk aversion as global financial markets began to heal and as hopes surfaced that the most intense decline of demand and output had passed.  It is also true that Japan’s economy could not tolerate an 87 per dollar or stronger exchange rate.  Just like 1995 when the yen spiked to its all-time peak of 79.85, this trade-reliant economy got clobbered when its currency strengthened too far, setting in train forces that helped drag the yen back lower.

Strength against the dollar is also worrying Canadian officials.  Today’s Bank of Canada statement singled out “unprecedentedly rapid” Canadian dollar depreciation as a threat to the nascent recent improvement of the economy.  In a week that has seen the greenback so far edge marginally lower against sterling, the euro and Swiss franc, it has also recovered 1.1% against the yen and 0.6% relative to the Canadian dollar.  A firmer dollar, even if only for a while, is also now in the best interest of European and U.S. officials.  The euro set a new 2009 high yesterday of $1.4337, up 15% in the just three months and reversing slightly more than half of its prior loss from an intolerable peak of $1.6038.  Meanwhile, market chatter remains pessimistic toward the dollar, and that voiced vulnerability has been associated as a causal factor for rising energy prices and a result of feared runaway and inflationary deficit spending.  It is in the interest of the Obama administration to disabuse investors from these associations.  Avoiding perceived one-way downside dollar risk therefore serves U.S. interests as much as European ones.

Swiss officials were the first to express intolerance against currency market developments, only their focus was the euro cross rate.  Swiss officials have intervened several times to prevent the franc from strengthening past the 1.5 per euro level and continue to be successful in that goal even though the franc has not backed off far from that barrier.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.


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