Early 2019 Check-Up on the Dollar

January 10, 2019

Compared to volatile share prices and sovereign debt yields, key dollar relationships like EUR/USD and USD/JYP have been pretty stable lately, and neither of those pairs is trading in historically extreme territory.

The euro just passed its 20th birthday. Over the four quadrants of this lifespan, the common European currency had an average value of $0.9927 in 1999-2003, $1.3176 in 2004-08, $1.3455 in 2009-2013, and $1.1711 in 2014-2018. At birth, the euro weighed roughly $1.1800, got initially as weak as $0.8228, later strengthened to a peak of $1.6038, and is quoted currently at $1.1505, a mere three pennies weaker than when launched.

Looking at its quarter-end quotes, the dollar is presently on a run of three straight quarters in which it appreciated against the euro. That streak is above the average in length. There was one other upward streak during the past 20 years lasting three quarters and four times when the dollar appreciated four straight times on a quarterend to quarterend basis. The dollar failed to string together a streak of five or more quarterly advances, rose in back-to-back quarters four different times. The most common occurrence of dollar appreciation was a single rise sandwiched between quarters when the dollar fell, and this happened nine times against the euro.

The frequency of successive quarters in which the dollar fell against the euro also reveals four instances in which the wave lasted four or more quarters. But two of those streaks went for five quarters, and another stretched to six consecutive quarters. There have been no cases of three straight quarter-to-quarter declines. Six times saw the dollar post back-to-back declines, and in eight instances a single quarterly drop was sandwiched between quarterly upticks. Bottom line, quarterly streaks of three of more same-directional movements happen less frequently than shorter runs.

What about dollar/yen these past twenty years? The dollar last year rose against Japan’s currency in the middle two quarters but fell in 1Q and 4Q. It’s also a tad weaker now than at the end of 2018. Dollar/yen averaged 116.82 yen in 1999-2003, 111.13 in 2004-2005, 87.68 in 2009-2013, and 111.65 over the latest five calendar years. The dollar at this writing exchanges for JPY 108.38. The longest streak of quarterly dollar advances against the yen went for five quarters and happened just once. There were two streaks of four consecutive quarterly rises against the yen and also two times when a streak of three upward moves in a row. Upward streaks of two quarters happened seven times, and there were also eight singletons of appreciation. No dollar downward streaks were sustained of more than three quarters, but that number happened five different times. Mirroring the pattern of brief upward streaks, the dollar fell two straight quarters against the yen on seven occasions and experienced a single quarterly drop eight different times.

Handicapping how currencies will perform in 2019 is especially precarious because their fate may depend more critically on political factors than economic trends. Two flashpoints loom in March alone. First is the March 2nd deadline for achieving a U.S.-China trade deal, without which huge tariff increases on both sides are threatening to get imposed. The other happens on March 29 by which time either a Brexit deal is worked out, the U.K. leaves the EU without a deal, or a second referendum provides a mechanism to stop the clock before this time bomb detonates.

The United States is another area of great political uncertainty. An end to the federal government shutdown is not in sight, and such will become the longest ever very soon. The dollar strengthened in the first quarter of 1996 when a combined 26-day shutdown occurred but fell in 4Q13 when there was a shutdown of 16 days in October. The Mueller investigation is drawing closer to its end and could segue into congressional hearings on President Trump. Watergate played out against a backdrop that included the floating of the dollar against other key currencies and stagflation triggered by a quadrupling of oil prices.

A big impetus behind the dollar’s three straight quarterly advances to end 2018 now looks less clear-cut. This was the dichotomy of Fed tightening and very easy monetary policies elsewhere. FOMC minutes released yesterday reveal second-guessing among some committee members about the cost-benefit trade-off of risks of continuing gradual rate hikes. Members of the BOJ Board are also getting antsy that their stance is hurting Japanese banks, so an unexpected policy shift could occur there, too. Euroland’s economy has weakened but, according to assumptions made in the Bank of Canada’s Monetary Policy Report published yesterday, should sustain growth of about 1.6% both this year and next. Asset purchases by the ECB ended last month, but the outstanding holdings are being kept, and an eventual first interest rate rise in 2019 is looking increasingly doubtful.

A wild card as always is what happens to oil, which so often depends on middle eastern political decisions as much as economic matters. All things considered, 2019 figures to be a difficult year to navigate for market watchers and players.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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