The U.S. Dollar gave even more of its recent gains last week after the Spanish bond auction eased market debt fears in the Eurozone and China announced its shift to a new exchange rate policy with greater flexibility.
Also, European exchange rates traded correctively higher after much of the bad news for those currencies already seemed to be out. As a result, the British Pound Sterling was up 1.8% and the Euro rose 2.2% on the week.
Nevertheless, the appreciation in the commodities currencies was the highlight of the week, as the forex market’s main movers were led by the Australian and New Zealand Dollars which each gained 2.4% versus the Greenback over the week.
This strength came on the back of the Chinese move, as well as on gains in the price of crude oil and gold making another all time record high of $1,263.70 an ounce on Friday. The usually more stable Canadian Dollar was not left too far behind, and USDCAD fell 1% over the week as the Loonie also strengthened.
Chinese Shift on the Remnimbi to Greater Flexibility
The U.S. Dollar continues under pressure with the latest blow to its value provided by China, which announced its intention this past Saturday to allow the Yuan to float more flexibly in the foreign exchange market against a basket of currencies. This new policy will significantly reduce the Chinese currency’s former peg to the U.S. Dollar.
The People’s Bank of China or PBOC released the announcement over the weekend in a published statement entitled, “Further Reform the RMB Exchange Rate Regime and Enhance the RMB Exchange Rate Flexibility.” The RMB is the ISO 4217 currency code that refers to the Yuan, which is also known as the Remnimbi.
The somewhat unexpected move by China comes just ahead of next week’s G-20 summit meeting to be held on June 26th and 27th in Toronto. On the positive side, the shift represents the start of a new era for the growing Asian economies and makes a trade war between China and the United States seem less likely.
Stocks in Asia were up over 2% at the Monday opening on the news, while the U.S. Dollar gapped lower against all the major currencies, but most notably against the Australian and New Zealand dollars that have substantial commerce with China. Commodities were also higher, with crude oil moving above $78 per barrel and gold posting yet another new record high of $1,265.05 an ounce.
The Yuan’s peg to the U.S. Dollar has remained at 6.83 for the last 23 months, and the Yuan strengthened to 6.7976 on the news, as the PBOC stepped aside from intervening in the currency market on Monday.
The U.S. Dollar’s Eventual Devaluation
Perhaps the most compelling question facing the forex market this week will be how the new flexibility in the Chinese currency’s exchange rate will affect other currencies, and most importantly the Greenback, against which the Yuan was formerly pegged.
The former peg that was previously staunchly defended by the PBOC has provided one of the more compelling reasons that China is the number one foreign holder of U.S. Treasury Securities. The U.S. Treasury notes that China holds over $900.2 billion of U.S. Treasury debt as of April of 2010.
Furthermore, with the world now awash in U.S. Dollars as a result of recent excessive stimulus spending due to the U.S. Government’s bailout fiasco, it seems that only the market’s risk aversion has been supporting the Greenback and then largely due to its status as a reserve currency.
Accordingly, the eventual devaluation of the Greenback seems like it will only be a matter of time, and the formerly almighty Dollar’s loss of value has already begun to show up, perhaps most notably against the price of gold which has recently made a string of all time highs.
When investors engage in a flight to quality that does not mean to low quality and the U.S. Dollar seems to be approaching its day of reckoning. With the U.S. government running up enormous budget deficits and the U.S. economy teetering on the brink of a possible double dip recession, printing more bailout and stimulus money will not get the U.S. economy out of the proverbial woods.
After the Euro debacle, and with the U.S. Dollar also looking less attractive, the central banks of the world are actively searching for a new reserve currency. China has suggested using the SDRs or Special Drawing Rights used by the IMF that are based on a basket of major currencies. Also, Russian President Medvedev even proposed using the Ruble as a reserve currency last week.
Overall, the dynamics of the currency market are undergoing a major transformation as the previous dominance of the U.S. Dollar as a reserve currency is being challenged, and the European Union continues suffering from internal turmoil. As always, new opportunities will arise for those willing to assume the risk.
A Two-Tier Euro?
Europe has unfortunately followed the United States’ unwise example of bailing out its “too big to fail” mega corporations by acting to bail out spendthrift countries like Greece instead of allowing them to fail and default on their excessive debt burdens.
This unnecessary use of financial resources by the less wealthy members of the European Union has made many critics of this policy in the more affluent countries such as Germany and France want to bail out of the Euro entirely.
Furthermore, according to a report in the U.K.’s Daily Telegraph newspaper, Germany and France are now even considering a two-tiered Euro system. This proposed plan would create a “Super Euro” for the more financially sound countries of German, France, Holland, Austria, Denmark and Finland, as well as the regular Euro for the beleaguered indebted countries of the Eurozone like Greece, Spain, Portugal, Italy and Ireland.
In addition, many rumors about Germany returning to the Deutschemark, and even printing up new stores of the former German currency, have been circulating on the Internet and among forex traders. While nothing is yet confirmed on this subject, a growing number of forex market observers would not be too surprised if this talk eventually turns out to be true.
Weekly Recap and Outlook for the U.S. Financial Markets and Dollar – 6/21/2010
The U.S. Dollar continued its consolidation last week falling against all the major world currencies and down especially against the commodities dollars of Australia, New Zealand and Canada.
The risk aversion previously prevalent in the global currency market, which sent the USD and the JPY to new highs at the height of the European sovereign debt debacle, has given way to renewed risk appetite sending the commodities currencies higher. Read full report
Weekly Recap and Outlook for EURUSD – 6/21/2010
EURUSD continued higher last week as positive results from Spanish and other Euro bond markets helped traders set aside concerns over the Spanish sovereign debt situation. The pair started the week by trading off of its weekly low of 1.2108 seen on Monday, continuing higher on Tuesday after a Spanish bond auction raised €5.2B for Spain and despite a considerably lower than expected German ZEW Economic Sentiment Reading which showed a reading of 28.7 versus a consensus of 48.7. Read full report
Weekly Recap and Outlook for GBPUSD – 6/21/2010
GBPUSD continued its corrective rally as the U.S. Dollar declined further last week. The rate began the week by trading off of its weekly low of 1.4521 made on Monday as the Confederation of British Industry raised its estimate for U.K. GDP to 1.3% from 1.0% and the U.K. RICS House Price Balance came out at 22%, better than the expected 16% consensus. Read full report
Weekly Recap and Outlook for AUDUSD – 6/21/2010
AUDUSD continued benefiting from growing risk appetite last week and rallied sharply. Beginning the week with a Bank Holiday in Australia, the RBA released its June monetary policy meeting minutes on Tuesday. In the minutes, the central bank noted that the European situation had “deteriorated significantly” and that it would weigh on world economic growth. Commenting on the seven percent decline in the Australian Dollar recently, the bank seemed rather unconcerned when it noted that, “Taking a longer perspective, the Australian dollar remained well above its post-float average, both against the US dollar and in trade-weighted terms.” Read full report
Weekly Recap and Outlook for NZDUSD – 6/21/2010
NZDUSD was also among the biggest gainers last week, with risk appetite propelling the currency higher. The pair began the week trading off of its weekly low of 0.6888 on Monday as New Zealand Retail Sales came out showing a -0.3% decline month on month versus a market consensus of a -0.2% decline. In addition, New Zealand Core Retail Sales were released showing a -0.2% decline month on month, slightly better than the -0.4% consensus. Read full report
Weekly Recap and Outlook for USDJPY – 6/21/2010
USDJPY traded lower last week as the Dollar continued weakening. Trading off of its weekly high of 92.10 seen on Monday, the rate continued lower as the Japanese BSI Manufacturing Index showed a reading of 10.0 versus the 7.8 expected. Also Monday, the Bank of Japan announced it would leave its benchmark Overnight Call Rate unchanged at 0.1%, as was widely expected. Read full report
Weekly Recap and Outlook for USDCAD – 6/21/2010
USDCAD traded lower last week, after risk appetite returned to the markets. The week began with the pair showing some strength on Monday and making its weekly high of 1.0360 on Tuesday, despite positive Canadian economic numbers. Canadian Labor Productivity came out at 0.7% versus a 1.4% expected, and the Canadian Manufacturing Sales number came out at 0.2% versus a 0.3% consensus. Read full report
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