Euro Weakness, Not Dollar Strength

August 10, 2012

The euro peaked at $1.6038 in July 2008 and at a trade-weighted value of 117.77 five months later, still a couple of quarters before the outbreak of Europe’s fiscal debt crisis.  Given the severity of the crisis, the common currency’s slide has been moderately paced, never approaching the intensity of several pre-euro era currency swings.  The main strains have been felt in fixed income markets, not the euro.  At its annual highs, it managed to touch $1.5144 in 2009, $1.4582 in 2010 and $1.4939 last year.  That’s not a typo; EUR/USD had a higher peak in 2011 than in 2010.  This fluke, to be sure, will not be repeated in 2012.  The euro’s strongest dollar quote so far this year was $1.3486, and chances still look considerably more encouraging that the post-2008 low of $1.1878 in June 2010 will be taken out later in the year than for a test of the earlier high.

By Swiss National Bank policy design, the franc has been hitched tightly to the euro, so it too has depreciated extensively, retreating as much as 29% from a 2011 peak of 0.7085 per dollar to a 2012 low touched last month of 0.9972.  The cost of enforcing the franc’s 1.2000 per euro ceiling has been greater than monetary authorities imagined, and much has been speculated about the difficulties of managing the composition of Switzerland’s ballooning currency reserves and whether a breaking point is approaching when the policy might be scrapped or modified.  The euro’s fate as an intact currency remains as uncertain as ever, since among other things a review of Greece’s compliance with promised reforms is due next month.  Many other critically influential developments for the euro area also happen, so the coming several weeks would be an inappropriate time for the Swiss to change policy plans again.

Against other widely traded currencies such as the yen, sterling, and Canadian, Australian and New Zealand dollars, the dollar presents a much more stable picture this year than in its relationships with the euro and franc.  The table below compares the present spot dollar quotes to period high/low range midpoints in the first quarter, second quarter, and July of 2012 and to its 2011 average values.  In combination with the dollar’s upward trends versus the euro and franc, these documented trends support the conclusion that the currency story of 2012 has been one of euro softness, not dollar strength.  A comparison of movements of the trade-weighted dollar and trade-weighted euro conveys the same impression.  The euro on such a basis is 5.9% weaker than at end-2011, while the dollar is 1.5% firmer.  From the euro’s high and dollar’s low in 2008, the common currency has dropped 19.7%, and the dollar has recovered 7.4%.

H/L Midpt 2011 Ave 1Q12 2Q12 July August 10
GBP/USD 1.6056 1.5635 1.5785 1.5580 1.5678
USD/JPY 79.70 80.09 80.48 79.01 78.25
USD/CAD 0.9889 1.0078 1.0122 1.0079 0.9916
AUD/USD 1.0328 1.0499 1.0028 1.0356 1.0569
NZD/USD 0.7915 0.8119 0.7889 0.8016 0.8124

The week to August 17th will be dominated by the release of second-quarter GDP growth for Japan, Euroland and many individual economies in Europe.  The spring quarter saw weaker activity in many corners of the world, including if not particularly Continental Europe and Japan.  Investors are braced for news that will promote and reinforce risk aversion, a backdrop that usually helps the dollar and yen.  Markets already have the GDP results from the United States (up 1.5% annualized versus 1Q and 2.2% on year), Britain (down 2.8% from 1Q and off 0.8% on year), China (up 7.4% sequentially at an annual rate and 7.6% on year) and South Korea (+1.5% from 1Q and 2.4% versus 2Q11).  GDP in Japan due Monday is likely to be zero or a tad negative, and Euroland GDP probably tumbled about 2.5% annualized and fell between 0.8% and 1.2% on year. 

A number of significant indicators of U.S. activity and prices are also getting released next week.  These include industrial production, retail sales, housing starts, the index of leading economic indicators, the Philly and New York Fed manufacturing indices, and both producer prices and consumer prices.  Last week started with the pendulum of investor sentiment tipping toward hope but wound down showing an increasingly guarded mood.  In these August thin markets, flows and positions often carry more directional clout than the ebb and flow of announced data and other news.  The distraction of the London Olympics is about to end, and it’s natural to expect anxiety to mount as the end of summer and September near. It’s time to return to school for more people than the children.  Not only does September loom as a month of reckoning for euro area officials and the region’s creditors, but it also marks the demarcation between the two-year-long unofficial presidential campaign and the eleven-week home stretch when the race will be decided.  Market players have experienced a calm August thus far but understand well that it could be a fleeting respite to catch one’s breath.  Enjoy yourself.  It’s later than you think.  We live in an age of uncertainty that seems poised to be raised to an even higher level.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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