Now and a Year Ago

March 8, 2016

In trade-weighted terms, the dollar, euro, and yen are each stronger now than a year ago.  The yen’s year-over-year gain of 6.8% is considerably greater than the euro’s rise of 1.9% or the dollar’s of 0.9%.  The dollar based on expected divergent monetary policies was expected to have performed much better than it did.

On purchasing power parity considerations, the dollar is currently substantially overvalued against both the yen and euro in spite of movements during the past year.  In bilateral terms, the dollar in the period advanced 6.4% against sterling but fell 6.7% relative to the yen.  Lesser changes of -1.6% and +0.7% occurred against the euro and Swiss franc.  The weakness of commodities, commodity-sensitive currencies, and the monies of other developing economies is the reason why the currencies of advanced economies have appreciated in trade weighted terms.  The greenback is 9.0%, 6.2%, 3.9% and 3.8% stronger than a year ago against the kiwi, Canadian dollar, Chinese yuan and Aussie dollar.

The declines of equities and bond yields during the past year is a global trend.  Ten-year sovereign debt yields have fallen 57basis points in Great Britain, 50 bps in Japan, 39 bps in the United States and 20 bps in Germany.  The DJIA (-5.1%) and S&P 500 (-4.2%) have lost much less ground than the German Dax (16.1%), Japanese Nikkei-225 (11.5%) and British Ftse (-11.4%).   

A year ago, when the monthly Economist survey of forecasters introduced projections for 2016, analysts were expected economic growth this year of 2.9% in the U.S., 1.6% in Euroland, 1.7% in Japan and 2.4% in Great Britain.  Now they are projecting growth in 2016 of 2.0% in the U.S., 1.5% in the eurozone, 0.8% in Japan, and 2.0% in Great Britain.  Contrary to a widely held view, weakening growth isn’t necessarily correlated with a weak currency.  Sometimes the causation runs the other way.  The yen has risen in part because of Japan’s appeal to safe haven-seeking capital, and that appreciation foreshadows weakening growth.

So the latest issue of The Economist extends the monthly forecaster projections to 2017.  Real GDP is expected to accelerate marginally to 2.2% in the U.S., 2.1% in the U.K. and 1.6% in Euroland but slow to 0.6% in Japan where a consumption tax hike is planned.  Consumer price inflation rates for 2017 are seen averaging 2.2% in the U.S., 1.8% in Great Britain and Japan, and 1.4% in Euroland.  Sizable current account surplus of 3.3% of GDP in Japan and 2.6% in the eurozone counter sizable deficits of 2.8% in the United States and 3.8% in Britain.

Some of the currency market wild cards during the coming year include the selection of a new U.S. government, the decision of British voters on whether to leave the European Union, the movement of oil prices and other commodities, the hardness or softness of China’s ongoing slowdown, and how much discernible damage to money markets is inflicted by negative interest rates in Japan and the eurozone.  we are now only a year and a half from the tenth anniversary of the onset of the world financial crisis.  In slightly less than ten years after the Wall Street crash of 1929, the Second World War had begun in Europe.  It took that kind of jolt to eradicate all lingering vestiges of the Great Depression, but history never replicates itself exactly.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



Comments are closed.