Weekly Foreign Exchange Insights: September 4th

September 4, 2009

Autumn for currency market participants covers the period from the Labor Day weekend to yearend, and it has traditionally been a challenging season for the dollar.  In this calendar interval from 1976 through 1991, dollar/mark fell in 13 of 16 years and posted an average drop of 5.0% over all 16 years in spite of a 10.2% gain in 1980.  During the last ten autumns, the dollar lost 2.0% per annum against the euro and 2.3% against the yen.  80% of the greenback’s 34.3% loss against the euro between end-2001 and end-2004 occurred during the autumns of those three years.  In selected past autumns against the yen, the dollar depreciated by 16.7% in 2008, 7.0% in 2006, 7.2% in 2004, 8.2% in 2003, 7.2% in 1999, 15.3% in 1998 14.5% in 1987, and 16.1% in 1985.  The autumn season last year was distorted by surging risk aversion, which pulled the dollar in opposite directions against the euro (up 5.0%) and yen (down 16.7%).  With a global economic recovery now emerging, investors are again anxious to take on greater risk exposure in exchange for better returns, but the month of September, an historically poor one for equities, is viewed with particular caution this time because of their sharp and perhaps overstated recovery since March.

The calendar year has two other trading seasons, winter, which begins on January 2, and summer.  The table below presents movements of the dollar against selected other major currencies in those two periods this year.  The biggest changes were declines against commodity-sensitive currencies.   Against the backdrop of rising confidence in economic conditions and prospects, dollar movements against other currencies were surprisingly muted through the end of August.  Stock markets, by contrast, posted double-digit percentage gains in the United States, Japan, and Britain.

Dollar Against Winter 2009 Summer 2009
Euro -0.1% -2.2%
Sterling -8.3% -2.8%
Swiss franc +1.3% -2.3%
Yen +4.5% -1.9%
Canadian Dollar -8.0% -3.0%
Aussie Dollar -9.6% -8.1%
Kiwi -5.9% -10.0%


Currency dealers are passionate central bank watchers, but the time remains distant when shifting interest rate differentials become a sustaining foreign exchange market driver.  Most analysts agree the road to recovery will be uneven, and financial markets have not regained fully normal functionality.  Weak labor markets will persist.  Although the loss of 216 thousand U.S. jobs in August represents further welcome improvement, only five months associated with either of the prior two recessions saw employment drop by a greater number.  New claims for unemployment insurance of 570K in the latest week to August 29 exceeded the eight-week average of 564K and surpassed the 535K average level during the twelve weeks from 10/25/08 to 01/17/09, a time when the recession was in fourth gear.  Most central banks such as the Swedish Riksbank, which have been transparent about when interest rates might begin to rise, are signaling a later, rather than sooner, start.  True, the Bank of Israel has already raised its key rate, and the Reserve Bank of Australia might act early in 2010.  But most will delay to mid-2010 or beyond.  Different issues will be guiding currencies in the meantime, and politics comes to mind.

Political change per se is not automatically a critical factor, but that is often the case because important policy shifts follow.  The landslide Democratic Party win in Japan brought back to mind the victory of Francois Mitterrand and the French Socialists in May 1981, which spawned three devaluations of the French franc totaling about 24% against the D-mark within the ensuing 22 months.  But whereas the franc’s troubles began immediately, the yen appreciated this past week, and the explanation can be found in the different context of the two elections.  In May 1981, the world was in the grip of high inflation, and  markets were high on the conservative market-friendly reforms of Reagan and Thatcher.  France was perceived to be out of step and wrongly so.  In the late summer of 2009, the world is struggling to escape a deep recession caused by unregulated market excesses, and inflation is negative in Japan’s case.  Japan’s Liberal Democratic Party had worn out its welcome, and personal consumption had floundered under the old political leadership.  If Japan’s new government manages to correct that deficiency, Japanese growth, equity markets, and the yen ought to perform better.

German voters go to the polls three weeks from Sunday to elect a government with a wide range of possible outcomes.  Chancellor Merkel hopes to emerge in position to replace the present right-left grand coalition with a more conservative, less-stalemated government that implement further reforms.  She may instead be stuck with what she’s had, or a combination of left-of-center parties could maybe pull off a big upset win.  Germany remains the linchpin of the continental European economy, much as it was before the euro. The German and Euroland economies move pretty much in tandem, up as well as down, so what’s happening in Germany exerts disproportionate influence over the euro.

The young presidency of Barack Obama is perceived to be in trouble even though the U.S. and world economies are in better shape than last January.  Health care legislation has become a lightning rod for disillusionment, which has been fanned in the media and by a sharp decline in the administration’s approval ratings.  Afghanistan looms as another quagmire.  But what does all this have to do with the dollar?  Just about everything.  Time and again, the dollar has reflected the good or bad political vibes surrounding the White House.  Think of Watergate, Carter’s talk about American malaise, Reagan’s restoration of U.S. pride and power, Clinton’s era of peace and prosperity, and the progressive incompetence and provocations of the second Bush era.

If the Obama ship is not righted this month, one can easily conjure up a weaker dollar scenario especially if economic recovery moves forward.  A W-shaped business cycle could alternatively recreate the risk averse conditions that lifted the dollar against many currencies a year ago, but that economic scenario is not the majority’s view.  Without safe-haven support, the dollar will have to navigate seasonal headwinds and diversification, which will become more appealing in the face of low U.S. interest rates, lessening risk aversion, and uneasiness over the Federal budget and Washington politics.  The dollar fell today on news of a smaller-than-feared loss of U.S. jobs in August, but the unit’s d
rop also was consistent with investors looking ahead to the autumn season and anticipating depreciation between now and yearend.

There are two other reasons to be leery about the the dollar’s near-term prospects.  In an economic upturn, the U.S. current account deficit may start to widen again.  Plus gold, the historic anything-but-the-dollar investment, bears watching as it advances closer to record highs.  The climb in gold from the $930’s less than three weeks ago had not been associated with a major dollar sell-off, and the de-coupling of those trends is being attributed to low inflation.  The dangers for the dollar are that gold draws more widespread attention climbing into unmapped territory and that expected inflation moves covertly higher even if actual inflation stays benign.

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


One Response to “Weekly Foreign Exchange Insights: September 4th”

  1. […] 10, 2009 · Leave a Comment The final paragraph of last Friday’s weekly Foreign Exchange Insights essay admonished that “in an economic upturn, the U.S. current account deficit may start to widen […]