Easter-Time 2011

April 21, 2011

The Good Friday/Easter holidays constitute the second quietest time of the year in foreign exchange trading.  Only at year-end does one find more markets observing closures.  Easter 2011 finds the dollar at extremely weak levels, and more and more market watchers worrying about a dollar crisis.

The dollar has set record lows against the Australian dollar and Swiss franc.  At lows so far today, a reading of 1.4649 per euro was the weakest since December 15, 2009, and that of 1.6569 per pound constituted cable’s priciest value since December 4, 2009.  One has to page back even further in time to find a stronger New Zealand dollar (all the way to February 27, 2008) or Canadian dollar (on November 12, 2007).  The Chinese yuan hasn’t been stronger than today since being revalued modestly against the U.S. currency in July 2005.

Only once in the dozen years since the euro was formed at the start of 1999 has the dollar been weaker than now on the day before Good Friday, that being a reading of 1.546 per euro on March 20, 2008.  The average value of the euro at the start of those dozen sequential Easter holidays was $1.1777, some 19% weaker than its current level.  Dollar/yen at this time during the past dozen years averaged 112.06, so the dollar is now 27% weaker than its mean pre-Easter value in 1999-2010.  In only three of those years was the yen stronger than 100 per dollar, and never before was the dollar below 90 yen.  During those twelve weeks around Easter (that is from the prior Thursday to the Friday after the holiday), the dollar rose six times each against the euro and yen, that is half of the time.  However, its average movements against the euro (down 0.3%) and the yen (up 0.2%) were small.  The absolute percentage change in the dollar was less than 1.0% seven times against the euro and in five of the years versus the yen. 

A final curiosity finds that the dollar’s average values on the day before Good Friday, respectively $1.7777 against the euro and JPY 112.06, were each close to but slightly stronger than its averages of $1.1942 and JPY 109.41 for all days since the beginning of 1999.  Eastern-time is a pretty good approximation of the dollar’s value at anytime but with an upward bias of about 2%.  This bias makes sense.  The U.S. non-seasonally adjusted current account tends to show a slightly greater deficit in the second half of the calendar year than in the first half, and the dollar tends to have a slight downward bias between the U.S. Labor Day holiday and yearend.

However weak the dollar might appear lately, market conditions do not resemble past “dollar crises.”  The best tests for defining a dollar crisis are not found in currency markets but rather in other financial instruments.  One tends to see falling U.S. share prices and rising Treasury yields, neither of which have been happening lately.

  • The Dow Jones Industrials average has risen 1.3% so far this month, 7.8% since end-2010, 12.2% over the past twelve months, and 89% since the closing on March 5, 2009.  The DJIA is also 18.6% higher than its average level since end-1998.
  • The ten-year Treasury yield at this writing of 3.38% is similar to the average since the end of 2008 of 3.25% and extends the sequential downtrend from means of 7.26% in 1990-94, 6.04% in 1995-99, 4.77% in 2000-04, 4.57% in 2005-07, and 3.65% in 2008.

Dollar crises are defined by the collateral damage they cause, and that so far has been limited to commodity prices.  Silver prices haven’t been as high as now in 31-1/4 years.  Gold touched a peak of $1,509.60 per ounce today, six times above its euro era low of $252.90 in July 1999 and 85.7% above its January 2009 low of $813.00.  West Texas Intermediate crude oil prices, which averaged $19.37 per barrel in 1987-98, $26.46 in 1999-02 and $61.47 in 2003-08, had dipped briefly under $33 at the time of the Obama inaugural.  Since then, oil has soared more than 3.4-fold to $111.78, including an advance of 64% in the past eleven months.

The elevation of commodity prices may or may not herald a coming dollar crisis.  Commodity price strains have lifted total inflation but not impeded the U.S. economic recovery, now in its eighth sequential quarter.  Continuing low long-term U.S. interest rates and a well-bid stock market indicate that a dollar crisis hasn’t arrived even if dollar weakness is a significant cause of the spike in commodity prices.  In official circles, dollar depreciation has engendered more understanding than panic.  When the dollar’s stewards in Washington are worried, they’ll remind markets that they consider a strong dollar in America’s interest because it promotes price stability, low interest rates and capital inflows that support growth.  If other government’s were alarmed, there would be more verbal complaints in public about the United States neglecting its currency.  ECB President Trichet hasn’t recently called euro strength “brutal” as he famously did when deficient economic growth was a bigger concern than inflation.  Japanese officials did intervene once last autumn and again with others to cap yen strength right after the Sendai earthquake, but further yen intervention seems unlikely until and unless Japan’s currency becomes a leader object of eroded confidence in the dollar or slashes its way convincingly past the 80 per dollar level. 

The actions of other Asian governments are not consistent with behavior to stem a dollar crisis.  Yes, some have reportedly been buying dollars in intervention, but the U.S. currency’s strength isn’t deterring them from raising their interest rates.  With $3.045 trillion of reserves, China has the most to lose if the dollar went into free fall, and that country’s discreet ongoing diversification away from the U.S. currency qualifies as a major source of selling pressure.  However, Beijing officials are paying visibly more attention to China’s inflation problem, and rumors and forecasts of a faster managed rate of yuan appreciation against the dollar simply will not go away.  As forecast transform into fact, the dollar’s trade-weighted decline will be apt to accelerate.  And if a dollar crisis does evolve out of all this present weakness, investors will know it by watching long-term U.S. interest rates and the stock market.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without permission.


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