Midyear Currency Check

July 1, 2011

The most recent chapter of the Greek sovereign debt crisis, like earlier episodes, was handled in a very messy fashion from all respects.  European leaders again treated symptoms, not causes, and after much brinkmanship addressed the immediate problems but probably bought only a little respite.  The Greek socialist government has scant credibility, and neither do its political opponents.  Daily news reels of the street protests in Athens could have been scenes from the Middle East, where throwing rocks at authorities is also the tactic of choice.  The IMF changed leadership, and the way that a successor was chosen hardly seemed democratic, fair, or in the best interest of that institution.  Despite a load of negatives, markets at end-quarter took away one message: a worst-case scenario has been avoided, and neither a default or EMU break-up is going to happen over coming weeks.  The risk-on trade was safe again.

The dollar predictably fell most sharply this week against commodity-sensitive currencies and the euro, posting drops of as of 15:00 GMT today of 2.6% against the loonie, 2.3% versus the Aussie dollar, 2.1% against the European common currency and 1.9% versus the kiwi.  The Swiss franc, by contrast, got roughed up a bit and fell 1.3% against the dollar over the week, proving that the franc is the quintessential paper currency to have in times of great risk.  Net dollar movements of minus 0.6% against sterling, +0.5% relative to the yen, and minus 0.1% against the yuan were inconsequential.  Not only will the Greek matter move off of center stage for a while, but the constraints of month- and quarter-end will be lifted when trade resumes next week.  Note that it will be a four-day week only in the United States, which is shut on Monday to commemorate its 235th birthday.

Midyear is a good place to take stock of where the currencies have been.  The table below compares spot dollar rates at 15:00 GMT on July 1 to its first-half average levels and the high/low trading ranges in 1H11 to those in full calendar 2010.  The midpoint of 2011 finds the dollar close to its first-half means against sterling, the yen, and Canadian dollar but weaker than those averages against the euro, Swissy, Aussie, and New Zealand dollars.  All of the dollar’s bilateral trading ranges against these other key currencies had weaker boundaries — both highs and lows — in the first half of 2011 than in calendar 2010.

  2010 Band 1H11 Band 1H11 Ave July 1
$ per EUR 1.4582-1.1878 1.4939-1.2964 1.4047 1.4492
$ per GBP 1.6457-1.4232 1.6745-1.5410 1.6170 1.6059
$ per AUD 1.0253-0.8068 1.1011-0.9785 1.0342 1.0741
$ per NZD 0.7976-0.6563 0.8318-0.7113 0.7783 0.8270
CAD per $ 1.0851-0.9926 1.0057-0.9443 0.9766 0.9621
CHF per $ 1.1730-0.9300 0.9785-0.8271 0.9049 0.8489
Yen per $ 94.98-80.25 85.54-76.25 81.90 80.90


The main theme of the currency market during the first, the tension between structural diversification away from the dollar on the one hand and risk avoidance on the other, remains very operative.  Diversification flies under the radar, but the force of its presence is reflected in the fact that the dollar depreciated even though reasons for risk-off trading were more prevalent than reasons for acquire more risk.  China continues to play a big role in this process with its massive $3.047 trillion stock of reserves as of the end of March which was 24.4% greater than in March 2010.  In the meantime, Beijing officials are still resisting a faster pace of appreciation in their currency.  It climbed just 3.6% against the dollar between the end of 2009 and end-2010 and by 4.0% at an annualized rate in the first half of 2011.

The second half of 2011 offers a number of wild card factors. 

  • Will U.S. currency policy be modified by Treasury Secretary Geithner?  New leaders of the Treasury Department have marked important turning points for the dollar at times in the past. 
  • Will advanced economies experience expanding business cycles and of sufficient strength?  Growth in the United States, Britain and Japan was slower than expected in the first half, and European data today reinforced other evidence that Europe lost considerable momentum as midyear approached. 
  • A related topic will be the sensitivity of long-term interest rates and economic activity to lower oil prices and the end of Federal Reserve’s quantitative easing. 
  • A great deal of attention during July will be focused on the debt ceiling standoff in the United States, which has direct negative implications for the United States but could create a bigger wave of risk aversion than Europe’s debt crisis caused.  Investors will assume that a default will be averted as they correctly did last month in Greece’s case, but they will hedge that presumption increasingly as an August 2nd deadline nears and no deal has been reached. 
  • Presidential election campaigns in France and the United States may become significant factors by late 2011.

All of the above developments have been widely considered and priced into markets.  Currency trends rarely hinge on long-anticipated possibilities, that is the “known unknowns” of Donald Rumsfeld.  Examples of these duds were the impacts of Y2K and the return of Hong Kong to China.  It is instead the “unknown unknowns” such as the two oil price shocks of the 1970s, the collapse of communism in Eastern Europe, and the World Trade Center attacks that seem to exert true game-changing influence in financial markets.  Through this journey of surprises, one constant in the currency markets has persevered, and that is the tendency for the dollar to grind its ways lower especially relative to rivals associated with a zealous pursuit of price stability.

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

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