Monday FX View: The Dollar Stands Still

Most currencies are higher versus the dollar to start the trading week although the dollar index is down a mere seven basis points to stand at 75.53. There are several contrary influences weighing on near-term direction, yet none seem persuasive enough to create a breakout from the recent range. With U.S. growth data due on later in the week the stakes were raised by Monday’s strong 2.9% GDP reading from South Korea – a whole percentage point better than was expected. This reminder that the Asian and pacific economies are snapping back fast and arguably bodes badly for the dollar. Will a strong U.S. report card hinder or bolster it, we wonder?

The Wall Street Journal dedicated a speculative column this weekend to the view that at next week’s FOMC meeting the committee will put forth the issue of how and when to announce the issue of raising interest rates to the world. It makes sense since other central banks around the world are having to deal with the subject, yet some members have recently indicated that given the spare capacity and rising level of unemployment, there really is no rush to jump-start the monetary engine. However, the yield curve is taking its cue from the article and is becoming steeper as back-month Eurodollar futures weaken.

It does not seem likely to us that the FOMC will really want to address a reversion to restrictive monetary policy any time soon if the rationale is purely to support the ailing dollar. By doing so, the Fed could easily create far bigger problems by unnecessarily forcing 10-year yields higher having spent months in talking and dragging them down in order to revive loan demand.

The WSJ article is perhaps preventing further erosion of the dollar today, yet it’s not really creating the greenback room to advance independently. The euro earlier reached a fresh 12-month high at $1.5063 after China’s Financial News, a journal associated to the central bank, opined that the country should find more room among its vast international reserves for the Japanese yen and the euro, while maintaining the largest position in U.S. dollars. So the article rekindled the prospects for further dollar displacement, but doesn’t go far enough in terms of being the type of news that fans the dollar-abandonment theme.

Accompanying the strong growth reading in South Korea today was news that during September China increased its imports of refined copper. This was the first gain in a quarter and argues for ongoing regional economic rebound. The news lifted metals price around the world as an anti-dollar hedge.

Some observers are starting to question last week’s dire GDP contraction in the U.K., which helped reverse the fortunes of the pound. Today the pound has recouped some losses to $1.6378 and one euro purchases 91.71 pennies. Bank of England policymaker, David Miles in an interview with the Scottish Herald said that he expects growth of 3% “soon” from the U.K. This would level the playing fields somewhat. It seems odd that Britain is completely missing out on a growth rebound especially with confidence continuing to rise. According to a KPMG survey, executives reporting ‘good’ or ‘very good’ responses to a recent confidence survey jumped from 9 to 19%.

Comments

[Mad Hedge F...:]

iiw It’s all about the dollar, which I have despised all year like the red headed stepchild it has become (click here for my initial recommendation). The assured onslaught of federal debt issuance headed our way will be the overriding investment consideration for traders and portfolio managers for the next decade. That will knock the stuffing out of the greenback against every currency except the Zimbabwean dollar, and even that will rally when you get a long overdue regime change. As the new currencies of barrels of crude oil, 100 pound ingots of copper, or rail cars of iron ore won’t fit into your wallets or purses, foreign currencies offer a great dollar alternative. There was once an argument that foreigners piled into these currencies to capture a huge yield pickup, but even that advantage is now gone, with almost everything now yielding nothing. The soggy buck also explains a lot of what is going on in our stock market, with companies earning most of their revenues from increasingly wealthy foreigners, like those in technology, energy, and commodities. As I write this, I am looking at new one year highs for my favorite picks of the former British crown colony currencies of the Canadian dollar (FXC), up 28% YTD, Australian dollars (FXA) up 49% , and New Zealand dollars (BNZ), up 80% dollars (for my C$report click here ). Their bounteous natural resources, Anglo-Saxon contract law, a semi common language, and vibrant ports make them the safe bet of choice. Sure, they are all overheated and way overdue for a short term pull back. But over the long haul, you can count on the loony to hit parity, to be eagerly followed by the Aussie dollar, and then the kiwi.

Oct 26 10:49 AM

[JasonC:]

Um, the dollar just went vertical, up 1% against the Euro in less than an hour, and not one news organization, website, or commentator has a story covering it.

Is anyone watching the actual markets, or does everyone just make things up to fit their political world-view or trading book and just hope it turns out to be true?

Oct 26 01:28 PM