U.S. Official Rhetoric Restores Dollar’s Upward Trajectory
September 28, 2022
There will be no Plaza Accord this time, according to U.S. National Economic Council Director Brian Deese. The dollar had doubled in value against such currencies as the German mark from late 1980 to early 1985 and was generating big strains in trade flows. The dollar had corrected partly in the spring but was threatening to turn higher again by September 1985 when financial ministries of the United States, Germany, France, the U.K. and Japan signed what came to be known as the Plaza Accord, an overt effort to dampen the dollars value. NEC Director Deese said the dollar’s current appreciation reflects fundamental economic forces, both the relative strength of the U.S. economy, the fact that the U.S. is a net energy producer, and the high level of global uncertainty that’s driving investors to seek safe havens.
The timing of Deese’s remarks were clearly targeted. Japanese officials had broken a 24-year hiatus against FX market meddling and conducted a record single day direct intervention operation last week, with threats of more to come. However, intervention is rarely successful unless supported by economic fundamental trends and when done in a concerted fashion by several countries. The U.S. current account deficit is historically large again at 4.3% of GDP in the first half of 2022, but the inflationary context of the spike is very different from late 1985, by which time the 12-month CPI rise had dropped to 3.2% on its way to 1.6% by the following spring.
The presidents of the Chicago and Saint Louis Federal Reserve Banks are the latest U.S. monetary officials to say that monetary tightening needs to be augmented further in coming months.
The weighted DXY dollar index rose overnight and at one point touched its highest level overnight since May 2000. The dollar is currently up 1.0% against the kiwi, 0.8% relative to the yuan, 0.7% vis-a-vis sterling, and 0.6% versus the Swiss franc. Record or multi-decade highs were set against a slew of other currencies such as the Indian rupee and Serbia dinar, but scant net change has occurred against the euro or yen.
What’s good for the dollar is bad for stocks. In Asia, share prices tumbled 3.4% in Hong Kong, 2.6% in Taiwan, 2.5% in South Korea, 1.6% in China and 1.3% in Japan. Equities fell over 1.0% so far in Germany, France, Italy and Spain, and a 0.8% drop in Nasdaq futures is leading key U.S. indicators downward.
The 10-year Treasury yield briefly got as elevated as 4.02% in overnight futures trading, most since August 2008 and starkly above 1.51% at the end of 2022. Comparable Dutch, Spanish, French and German sovereign debt yields are four basis points above their Tuesday closing levels.
But following the announcement that the Bank of England will be doing long-dated gilt purchases from November onward, the 10-year gilt yield pulled back from 4.50% to 4.22%.
Bitcoin is again below the $20k threshold and down 0.5% on the day. The price of WTI oil firmed 0.5%, while that of gold is 0.3% softer.
Hurricane Ian is expected to make landfall in about five hours around Fort Meyers, Florida, as a category 4 storm and to spend somewhat more than 24 hours crossing Florida before moving into the Atlantic Ocean.
The advanced estimate of the U.S. goods trade deficit narrowed 3.2% to $87.3 billion in August and a record gap of $126.4 billion last March.
German consumer confidence dived deeper below zero neutrality to a record low of -42.5 from -36.8 in the prior month and +0.4 a year ago.
French consumer confidence dropped 3 index points in September to match July’s 109-month low of 79.
Italian consumer confidence likewise fell 3.5 index points this month to July’s 20-month low of 94.8. Business confidence in Italian manufacturing fell 2.1 points to a 19-month low. Italian industrial sales posted a second straight monthly decline in July; an on-year 16.8% increase was down from an 11-month high of 23.6% in June.
The Swiss index of investor sentiment toward that economy weakened 13 points in September, was below zero for a seventh straight time and, at -69.2, was not much weaker than June’s 88-month low of -72.7.
Austria’s manufacturing purchasing managers index in September matched August’s 26-month low of 48.8 and considerably worse than the record high of 67.0 in July 2021.
Japan’s indices of leading and coincident economic indicators for July were each revised lower. The LEI was its weakest since January 2021, and the COI was the lowest since September 2019.
In August, retail sales rose 0.6% in Australia, a somewhat larger monthly advance than forecast. But Danish retail sales edged up just 0.1% and fell 5.0% on year; Swedish retail sales fell 0.4% (the fourth straight monthly drop) and by 5.1% on year; Norwegian retail sales rose 0.7% (only the first increase in 5 months) and were 4.0% lower than a year earlier; and Irish retail sales broke a streak of three straight monthly declines and were still 5.6% weaker than in August 2021.
Two central banks announced interest rate hikes today.
The Bank of Thailand’s policy rate was lifted 25 basis points as expected to 1.0%. That was the second such increase, the first being done just last months. At 1.0%, the rate remains 25 basis points less than Thailand’s pre-pandemic level of 1.25%. CPI inflation had climbed to 7.86% by August, but BOT officials project such receding to 2.6% next year. According to today’s statement, “The Committee is ready to adjust the size and timing of policy normalization should the growth and inflation outlook shift from the current assessment.”
A 75-basis point hike in the Bank of Mauritius policy interest rate today was the third increase of 2022 following ones in March and June totaling 40 basis points combined. Although back at its February 2020 level, the 3.0% new interest rate is far lower than CPI inflation, which has advanced to a 14-year high of 11.5%. An accompanying statement characterizes today’s move as an appropriately more aggressive normalization of interest rates and forewarns that “the MPC will continue to monitor the economic situation closely and stands ready to convene between its regular meetings, if the need arises.”
Minutes from the Bank of Japan’s July 20-21 Board meeting when Japan’s currency was trading at 138 per dollar reveal that that officials were already growing worried about the yen’s depreciation.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: German and French consumer confidence, Italian consumer sentiment and business confidence, NEC Director Brian Deese, Plaza Accord
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