The Economist published an article about the sad state of world currencies. While just a few months ago Europe’s debt crisis had markets panicking about sovereign risk, it seemed that all roads led to the U.S. dollar. How quickly things change. The Euro recovered, and the US sank.
It is, as we have commented several time before, a battle for a cheap currency. The magazine says that this may eventually cause transatlantic and transpacific tensions: "not everyone can push down their exchange rates at once. For now, though, the dollar holds the cheap-money prize"
Note that we track all currency ETFs live here.
"... On August 11th the dollar fell to a 15-year low against the yen of ¥84.7. It perked up against the euro to $1.29, though that was still much weaker than the $1.19 it reached in early June when euro-revulsion was at its worst (see chart 1). The ground the greenback has lost in recent weeks owes to a run of weaker data about the economy, not least on jobs (see box on the next page). On August 10th the Federal Reserve conceded that the recovery would probably be slower than it had hoped. The Fed kept its main interest rate in a target range of 0-0.25% and stuck to its creed that rates would need to stay low for “an extended period”. In addition the central bank said that it would reinvest the proceeds from the maturing mortgage bonds it owns into government bonds to prevent its balance-sheet (and thus the stock of ready cash) from gradually shrinking.
This modest change in Fed policy was widely expected. It signalled concern about the economy while stopping short of panic measures. That did not stop stockmarkets from slumping the day after the Fed’s statement—perhaps because investors had hoped the central bank would go further and commit itself to a fresh round of asset purchases, or perhaps because they were unnerved by the Fed’s more cautious tone on the economy. But the Fed’s shift still seemed to confirm that it is more minded than other central banks to keep its monetary policy loose, a perception that has contributed to the dollar’s slide and helped America’s exporters. The day before the Fed’s decision, the Bank of Japan kept its monetary policy unchanged. The European Central Bank (ECB) has allowed short-term market interest rates to rise as it withdraws emergency liquidity support from the banking system.
Events in America do not determine the dollar’s fate: exchange rates have two sides. The euro has bounced back since June in part because markets are more confident that Europe has got to grips with its sovereign-debt problems. The currency’s strength also reflects a stronger economy. Figures due out after The Economist went to press were expected to show that the euro area’s GDP grew a bit faster than America’s in the second quarter, thanks largely to booming Germany. But the problem of sluggish growth in the euro zone’s periphery has not gone away. A strong euro amplifies the lack of export competitiveness in Italy, Spain, Greece and Portugal. That is one reason why many analysts think the euro is likely to weaken again.
The yen’s rally, in contrast, may have further to run. It is trading against the dollar at levels last seen in the aftermath of the peso crisis in the mid-1990s, when the yen had greater claim to being a haven from troubles elsewhere. But the yen’s renewed strength may not be quite as painful for Japan’s exporters as that implies. Years of falling prices in Japan combined with modest inflation elsewhere mean the real effective exchange rate is below its average since 1990 (see chart 2). Because Japan’s wages and prices have fallen relative to those in America and Europe, its exporters can live with a stronger nominal exchange rate.
What needs explaining, then, is not why the yen has strengthened recently but why it was so weak before. Kit Juckes of Société Générale reckons that the low yields on offer in Japan provide most of the answer. “The yen is under-owned because Japan had by far the lowest interest rates in the world,” he says. But now falling bond yields in America, as well as in most of Europe, have made Japan a less unattractive place for investors to put their money. The more that the rest of the rich world resembles Japan, the less reason there is to shun the yen. There are even stories that China has been buying Japanese bonds as part of its effort to diversify its currency reserves away from the dollar.
Such interest may not be entirely welcome in Japan. A cheap currency is especially prized now, when aggregate demand in the rich world is so scarce and exports to emerging markets seem the best hope of economic salvation. Japan’s finance minister has complained that the yen’s recent moves are “somewhat one-sided”. That kind of talk has spurred speculation that Japan’s authorities may soon intervene to contain the yen’s rise. But such action would spoil the rich world’s efforts to persuade China to let its currency appreciate. It is perhaps more likely that the Bank of Japan and the ECB will follow the Fed’s lead in extending (albeit modestly) its quantitative easing—or risk a rising exchange rate".
Friday, August 20, 2010
Cheap World Currencies: A Race to the Bottom
Subscribe to:
Post Comments (Atom)
Blog Archive
-
▼
2010
(1051)
-
▼
August
(48)
- Profit From the Bond Bubble Bursting Through TLT
- Japan in Trouble; Must Drop Interest Rates to Zero...
- Natural Gas Contango Drops
- 2010 Percentage of Income Spent on Food, Per Country
- Global Companies Investing Heavily in Brazil - Wit...
- Jackson Hole: The Fed Caused the Bubble; Beware th...
- Vale to Acquire Fertilizer Companies: Major Plans
- Latest Analysis S&P500: Repeated Negative Engulfin...
- Blockbuster Bankruptcy: Netflix and The New Digita...
- Roubini: Double Dip Recession Now 40%; Growth to b...
- The Great Intel Sinks Again: Profit Either Way, Up...
- Markets Crashing Further or Bouncing, QEII Coming:...
- Natural Gas Straddles For UNG: Profit With Up or D...
- US Dollar Rising: Stocks Collapse
- One More Reason to Go Long Natural Gas
- Cheap World Currencies: A Race to the Bottom
- Brazil Is Now World's 8th Largest Economy
- The Jobless Claims Story: Back Over 500k; Spin, sp...
- Going Long Natural Gas and Oil
- Greece in Depression: Austerity Measures Are Backf...
- Top 10 Dividend ETFs, To Buy and To Sell; Dogs of ...
- The Struggling American Economy: This is Serious, ...
- Opportunistic BHP Goes Hostile Against POT; BHP: T...
- Back to Square One: Feb Buys $2.55B In Treasuries ...
- Aginflation Coming As Russia's Grains in Trouble; ...
- Aviation: New Embraer Cargo Plane, KC-390, To Fly ...
- Buyer Beware: Today's Fake Rally Will Not Last
- The Tale of Two Countries: Brazil Income Tax Colle...
- Brazil Finds Largest Land-Based Oil Reserves (PBR)...
- Ultra Hot Top Brazilian Companies Register All-Tim...
- The Yuan Unpegging: Yuan Loses 1% Since then
- POT Stock Jumps: Silly $39B Takeover By BHP Soundl...
- Fed Warns on Reverse Mortgages: Seniors Beware
- Matterhorn: World Economy Soon to Go In Accelerate...
- The Top 25 ETFs To Buy and To Sell For the 2nd Hal...
- Chile Firing on all Cylinders: Currency is the Bes...
- Spanish Crisis Continues: Banks Relying Very Heavi...
- Chavez' U.S. Dollar: Green Lettuce Anyone?
- The ETF Graveyard Grows: Agricultural ETFs Being D...
- Cisco Is Now A Strong Buy
- Europe Crisis Part II: Spain Deep Financial Proble...
- U.S. GDP Growth and Hiring to Drop
- S&P 500 Crucial Support About To Fail
- How to Find Potential Winning Trades Without Spend...
- Is Oil Going Higher or Lower? Analysis and Indicators
- Brazilian Giant Itau Posts Record Profits
- Kinross Buys Redback Mining Creating New Gold Gian...
- Who Calls Consumer Spending Stagnation 'Unexpected"?
-
▼
August
(48)
No comments:
Post a Comment