A Decent Month for Both the Dollar and Euro

May 30, 2013

The dollar strengthened a tad less than one percent against the euro in May, but both currencies seem poised for respectable net appreciation against most other currencies, especially ones that are sensitive to commodity price swings.  So far this month against the greenback, the Australian dollar has lost almost 7%.  The kiwi has dived over 5%, and the loonie is down more than 2%.  South Africa’s rand is more than 15% weaker than its 2012 closing.  Although not quite matching strides with the dollar, the euro rose during the month against sterling and the Swiss franc.  All three of those European currencies are comparatively close to their year-to-date averages, which are respectively $1.3117 per euro, 0.9371 francs per dollar, and $1.5426 per pound.  The 2013 range of EUR/USD has spanned a dime in width, ranging from $1.2744 to $1.3711, but even that high/low spread of 7.6% overstates the movement due to the euro’s tendency to return to $1.30 whenever it strays beyond a very tight orbit around that pivot point.

EUR/USD is the most important currency against currency relationship in the international monetary system.  The stability of this pair has showered currency markets with a hypnotic drizzle.  The economic fundamentals look better in the United States than those in Europe, mainly due to the contrast of moderate expansion in the states versus six quarter of recession and counting in Europe.  This disparity hasn’t resulted in contrasting directions in securities.  U.S. treasury yields have risen 46 basis points in the past month, 16 more than German bunds, but the peripheral yield premiums in Euroland’s troubled economies remain much narrower than last year.  German equities rose more sharply than U.S. stocks in May, but the take-away is that both improved on balance whereas the Nikkei lost ground on balance.  A broader take-away is that the price action in stocks and bonds has been more remarkable than that in currencies.

A crisis of confidence seems to be festering around macroeconomic policies in Japan, Europe, and the United States.  Doubt has set in about Abenomics.  Japanese officials have had a somewhat inconsistent range of verbal responses.  One signal that everything will be fine and the unconcern expressed about higher long-term interest rates is a dangerous road to travel.  Japanese authorities mistakenly think that if people can be convinced verbally to believe in happy endings, reality will follow suit.  Promised structural reforms will need to be just as dramatic as the shock-and-awe shift in monetary policy.  Draghi’s OMT, the acronym for Outright Monetary Transactions, was a successful bluff at first but is arousing mounting skepticism.  On the critical need to restore the competitiveness of its weakest links, the euro area is simply not making progress, so the cost of keeping the currency union intact is rising.  For a nation paralyzed by political warfare, U.S. macroeconomic policies deserve some kudos.  The Fed softened the recession without igniting inflation.  The jobless rate is unacceptably high but has fallen by this point more extensively from peak than anticipated.  The fiscal deficit has fallen sharply as a percent of GDP, and the current account deficit’s relative size has stayed level after being halved from a high of 6%.  The U.S. looks good next to Europe or Japan but poor against its own historical record.  And of course, considerable market anxiety surrounds the Fed’s exit strategy and Washington’s long-term budget problems, which haven’t been addressed.

Fixed exchange rates gave way to a floating rate system forty years ago in large part because of a vast inflation differential between the United States, Britain, Italy, France and others on the one hand and Germany, Japan, and Switzerland on the other.  These disparities helped forge divergent current account trends.  There were genuinely attractive currencies against which to play the currencies of countries managed less frugally.  The above nations can no longer be categorized as some with very high and others with very low inflation.  The main current account contrasts are now between China, whose currency does not trade freely, and the United States and within the euro area, with Germany owning a gigantic surplus but the currency union as a whole in only moderate net surplus. 

Over its 14-1/2 years of existence, EUR/USD has ranged in a 95%-wide band between $0.8228 and $1.6038, but wide swings do not seems to be in the offing now.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

Tags: , ,


Comments are closed.