January 09, 2004
Dollar has a very bad week.
The
Financial Times reports on the dollar's very bad week. I noted
the other day that it was going down at a rate of a penny a day. But it seems to be picking up. A penny an hour? Wow.
It was business as usual for the increasingly comfortable army of dollar bears this week as, after a pause for profit-taking mid-week, the dollar on Friday resumed its slide to new lows.
Unexpectedly weak job creation in the US weakened the dollar, and
it slumped more than a cent in minutes against the euro to $1.2868 on Friday before recovering some poise to trade ar ound $1.282.
Just 1,000 jobs were created last month, according to the US labour department, compared with economists' expectations of a 150,000 rise. The numbers weakened bond yields and the doll ar fell as investors scaled back their expectations for interest rate rises from the Fed this year.
Read more about the data in the FT. [Also an interesting article.]
It's about to crack the $1.30/euro barrier too, which should have a major psychological effect. It also appears that it would be going down even faster if it were not for massive intervention by the Japanese. But that even that seems to be having only a temporary effect, also apparently lasting only minutes. It would seem that the Japanese are reaching the limits of what they can do, and that like the European Central Bank, will just let it go.
But the Bank of Japan seemed to have other ideas about influencing exchange rates. The dollar traded in an unnaturally tight range around Y106.15 for three days with the market increa singly convinced the Bank of Japan was behind the army of dollar bids at that level.
Foreign exchange participants were equally convinced the bank was behind the concerted wave of yen selling on Friday, which sent the dollar rocketing to Y108.23 from Y106.6 in less th an 10 minutes.
Read more about the BoJ's interventions.
... Strategists were in no doubt Japan intended to continue intervening aggressively.
Derek Halpenny, currency economist at Bank of Tokyo Mitsubishi, said the closeness of the exchange rate to Y100 was a key factor.
"Last time it broke below Y100 in 1995 the dollar dropped to Y80 in three months and the risk is we get a repetition of that," he said.
"Japanese companies may already be starting to hedge more aggressively with that in mind and the authorities are very eager to avoid a repetition of 1995."
More aggressive hedging will put further pressure on the dollar, and if corporate treasurers lose confidence in the Bank of Japan's ability to hold the dollar-yen rate, they could inc rease the selling pressure by repatriating dollars at these levels instead of hoping for a stronger dollar.
There were signs of hasty selling in the dollar's rapid retreat from its high against the yen. Minutes after peaking at Y108.23, the dollar had slid back to Y107.5 and was at Y106.4 by the close of trade in London.
I said before that I think it will hit the $2/euro level by the end of the year. Now I think it might just do that by the end of summer, if not before. At the current rate it could cross $1.40 just by the end of January. It just seems unavoidable. The renewed attacks in Iraq, a jobs report that only 1,000 jobs were created in the US during December rather than the 150,000 that economists had predicted, which is really bad news given that it was during the holiday shopping season, the fact that the US government clearly thinks that rising stock markets are a reason to avoid making any major economic changes, accelerating American deficits, an election year which makes it impossible for either party to prescribe any harsh medicine, and many other developments all suggest that there is no reason to expect the trend to reverse. On the contrary, they indicate that it will accelerate.
The
Guardian business section has an overview on the reactions of various media around the world to the dollar's change,
Markets wonder where the buck will stop. It would seem that only fairly conservative publications in the US and the UK think it's not that serious. Everyone else predicts more of the same. One side is here.
"If you think the dollar has fallen too fast and too far, think again," warned the Singapore Business Times after the US currency started the year with another slide. In fact, in the Daily Mail Brian O'Connor warned US business leaders that the falling dollar "could become an avalanche".
And the other side is here.
The Bush administration was sanguine about the slump, and was backed by Michael R Czinkota in the Washington Times. The dollar's decline, he pointed out, was principally against the yen, the pound and the euro. "Against most other currencies in Asia, Africa or South America, there has been little change." Moreover, "central banks and other reserve institutions still prefer holding two-thirds of their currency reserves in dollars, rather than in yen or euros." Don't worry, he reassured readers, "when it comes right down to it - money is just paper. What really matters is the psychology behind it, the trust, outlook and confidence in the government which has issued the money ... The dollar avalanche predictors should know that there may be ups and downs, but at the end, we'll be on firm territory again."
Newsday, the suburban New York paper, went so far as to welcome the fall, "as long as it remains gentle and not the product of catastrophic forces".
Gotta love that "money is just paper" part. That's absolutely priceless. Does everybody else in DC know that? :) I'll have to keep that in mind when it comes time to pay my taxes. Will they accept toilet paper? And that it's all about "trust, outlook and confidence in the government which has issued the money." Actually, to a certainly degree that'sexactly it. It's not just the dollar that's falling, it's global confidence in the US government. But it's not just perception. The American deficits are very, very real, and growing. And sooner or later the bills come due. And to the folks at Newsday, is a penny a day "gentle?"
And where they say it's only against the yen, pound and euro.
Only?. Aren't these the three most important ones in the world, the currencies that most other countries use as a yardstick? In any case, that's a blatant lie, or at least a very severe distortion of the facts. It's affecting the Australian and Canadian dollars as well, and it's beginning to hit many others as well. The only major nation that seems to be going the other way is, sadly, Mexico.
