An Abbreviated Weekly Dollar Essay

March 4, 2015

Snow shoveling duty will limit the length of the dollar essay this week to a couple of developments worth watching.

The first is explained in an earlier posting today on Currency Thoughts that documents a very sharp narrowing of the U.S. and eurozone purchasing managers indices between November 2014 and last month.  This convergence in both manufacturing and non-manufacturing activity suggests that the U.S. fundamental economic advantage versus Europe may no longer be as vast as generally perceived.  The Greek debt situation, both the dire nature of possible outcomes and the high degree of uncertainty surrounding the matter, could still blow apart, driving a deep wedge back between U.S. and Euroland trends.  The next flashpoint will arrive in late spring.  A narrowing divide between the U.S. and eurozone economies partly reflects the euro appreciation.  The repercussions of the rising dollar on the two economies eventually can become a self-limiting force behind the exchange rate shift, but such a phase in market life has not hit the radar screens yet.   All of which brings us to my second point.

The momentum behind the rising dollar and falling euro has picked up lately.  From a 2014 euro high of $1.3993 last May 8, it took two months for the dollar to strengthen back through $1.3000, which first happened on September 4, and another four months for the euro to sing below $1.2000, which first happened on January 5.  However, it’s been just two months now and, at a low today of $1.1062, the euro is already challenging the $1.1000 barrier.  Beyond that will be the enormously important psychological level of par.  For most of its sixteen-year+ history, a euro has been worth more than a dollar.  In an age of inflation, currency strength bestows bragging rights.  In a deflationary world, the last laugh goes to the country with the depreciating currency.

My third and final observation today concerns dollar/yen and specifically the 120 per dollar level.  Over nearly the past three decades, no other level has served more as a gravitational center dollar/yen than 120.  It first became prominent as the eventual support level for the dollar in the post-Plaza Accord period.  In February 1985, the dollar bottomed at 262 yen.  At the time of the Plaza Accord some seven months later, dollar/yen was hovering near 240.  That Accord by the G5 endorsed the need for a weaker dollar to promote better external balances.  The dollar hit bottom at DEM 1.576 and JPY 120.45 on the first trading day of 1988.  Dollar/yen spent most of 1988 in the 120s against Japan’s currency, made another series run at that support level in November 1989 and January 1992.  The level was penetrated in September 1992 but not by much or long.  When the team of President Clinton and Treasury Secretary Bentsen took power in January 1993, an aggressive verbal upward jawboning of the yen ensued, and by August of 1993 the bilateral pair was approaching 100 per $.  The yen eventually peaked at 79.85 in April 1995 but then weakened past 100 by September.  For much of 1997 and 1998, while the Asian debt crisis was perking, dollar/yen found an equilibrium back in the 120s and often closer to 120 than 130.  There were numerous other periods in the years thereafter up to August 2007 when dollar/yen seemed to pulled toward 120 as if such were a magnet. 

While the euro seems destined for weaker grounds in coming months, dollar/yen is embedded near a level that in the past has produced choppy, directionless trading over fairly lengthy periods.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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