Currency Wars and the Fall of the U.S. Dollar

by: World Market Pulse

Gone are the days when the currency of a country was regarded as a barometer of a country's economic conditions. As the global economies, business and market trends change momentum towards the east, the relationship between a country's economy and its currency is getting much more complicated as governments across the globe are assuming a bigger role in propping up the financial system and encouraging economic growth.

Just as the US government released its employment data last week, the U.S. durable goods orders data and the dollar index fell below the key support level of 80 points, and fell over the seven month low of 79.255. The move came after the Federal Reserve said it would restart the quantitative easing monetary policy. Surprisingly, just a week after the National Bureau of Economic Research’s Business Cycle Dating Committee finally announced that the recession officially began in December 2007 and the economic downturn ended and the recovery officially began in June 2009, the US Dollar has been virtually in the red zones to its lowest level since February as stronger-than-expected data in Europe and a drop in US durable goods orders hurt demand for the greenback. The dollar also fell to its lowest in more than a week against the yen.

Although most experts agree that the drop in the dollar was mainly due to the Federal Reserve’s willingness to continue quantitative easing. An excess supply of dollars obviously leads to a fall in its value. Some traders attribute the dollar’s fall to the increase in risk appetite. This analysis does not ring true as the price of gold is making new highs, which actually signals risk aversion.

US Vs China

Although it's not just the yen but the Yuan as the depreciation of the Yuan compared to the Dollar has caused a growing tension between the U.S and China in recent weeks. The U.S is blaming the cheap Yuan for its economic issues and even financial sanctions against China have been on the cards. If these two giant economies are starting to threaten each other, the impact on the ever-slowing recovery could be enormous.

Meanwhile, China's vice commerce minister has described the U.S. House of Representatives Ways and Means Committee approved bill that would let the United States apply duties on goods from countries with undervalued currencies as being "redundant". The Yuan rose against the dollar on Monday even though the central bank lowered its mid-point after nine days of stronger fixings in the face of growing U.S. pressure on Beijing to let the currency rise faster.


Meanwhile, exporters across the globe have expressed deep concern over the constant fall of the US Dollar with Israeli exporters going to the extent of calling it a catastrophe, as the shekel-dollar rate hits a five-month low.

US dollar-yen

After the Japanese government's intervention in the currency markets by weakening the Yen for the first time in six years, the counter strike from the Dollar came when the Fed announced the readiness to introduce a new round of quantitative easing to boost the economy. After the latest move, Japanese experts have suggested that the dollar/yen might get caught between caution over another intervention by Japanese authorities and possible dollar selling by Japanese exporters ahead of the end of the first half of Japan's fiscal year.

The dollar meanwhile was little changed against the yen as investors hesitated to make major bets due to continuing speculation that Japan could again intervene to temper the yen's strength. Japan conducted dollar-buying, yen-selling intervention earlier this month for the first time in more than six years to curb the strong yen. At 0450 GMT, the dollar traded hands at JPY84.27, compared with JPY84.28 late Friday in New York. However, after the Fed hinted at continued quantitative easing, the yen rallied against the greenback. In fact, last Friday, the yen attempted to sell off but could not sustain the drop.

Euro-US dollar

The euro fell against the dollar and yen in Asia on Monday as U.S. and European hedge funds sold the common currency to lock in profits following its rise late last week. At 0450 GMT, the ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies including the euro, was at 79.341 compared with 79.280. Against the yen, the euro was at JPY113.54, down from JPY113.70.

Australian dollar-US dollar

The Australian dollar jumped against the US dollar and yen on Friday amid speculation that Tokyo had intervened. The Aussie was up 1.3% on the greenback as speculation continued to swirl that the Reserve Bank of Australia will raise interest rates as early as next month.

Disclosure: No positions