The dollar’s allure

September’s love affair with the dollar has continued on the first day of the new trading month, with the greenback enjoying further gains against all major currencies. Once again it is Europe’s inability to agree a strategy for combating its increasingly desperate sovereign debt and banking crisis which is contributing to the dollar’s allure. Overnight, the single currency has fallen still further, now near 1.33 (recall that in late August it was above 1.45).

Europe’s poisonous debt dynamics continue to infect risk appetite, with further significant declines in stocks, commodities, high-beta currencies and bond yields. In Asia, the Hang Seng dropped another 4% overnight, a loss of more than 25% in the last two months. Brent crude is down another 2.7%, now not that far away from USD 100 a barrel, whilst copper has fallen another 5%, a loss of close to 30% since early August. The South Korean won fell another 1.6% against the dollar, the Russian ruble has fallen 1.3% and the Indonesian rupiah is down 1%.

Guest post by FxPro

Both investors and traders await the next gab-fest of European leaders – finance ministers are meeting today in Luxembourg. Greece confessed over the weekend that it would not achieve the budget deficit target for this year of 7.6% of GDP; instead, it would be nearer 8.5%. How the Greek finance ministry could be this confident is something of a mystery as according to a weekend FT article, access to the main building for ministry workers in Athens has been blocked by protesters recently, preventing proper calculation of Greece’s fiscal position. Although it has been delayed, Greece’s creditors seem poised to sign off on the next tranche of aid money within a week or so.


ECB U-turn unlikely this week. The jump higher in eurozone CPI to 3.0% (flash estimate for September) could not have come at a worse time for the ECB, not least as speculation increases that it could cut interest rates before the year is out.   This flash estimate is based primarily on initial data from Germany and Italy, together with available information on energy prices. Clearly, the jump in Italian inflation from 2.3% to 3.5% was the primary driver, with price increases in hotels, cafes and restaurants being the core factor pushing the year-on-year rate higher. German harmonised inflation was also higher though, rising from 2.5% to 2.8%. These figures are the last thing that the ECB needs right now as Trichet steps into his last meeting as President this week. There have been thoughts that he would relent and reverse some of the policy-tightening he enacted earlier in the year, but this CPI data adds to the evidence that this is looking pretty unlikely.   Trichet’s mantra has been the protection of price stability, and with it keeping inflation contained.   Easing policy with inflation estimated at 3.0% would undermine all that has underpinned his policy-making for the past eight years. Furthermore, with policy-making being run by a committee of twenty-three, the ECB has shown itself to be far less able to perform quick about-turns than other central banks. More likely appears to be further concessions on the provision of liquidity to the European money market via the reintroduction of 1-year tenders to provide more certainty over the year-end period.   Thereafter, whilst it’s always more difficult to judge with the added uncertainty of regime-change, a rate cut from the ECB still appears more likely than not before the year is out.

Not much luck for the loonie. The last week or so has been a rocky ride for the Canadian dollar, with the loonie climbing to a 12mth high of 1.0524against the greenback overnight. Since the middle of last month, the CAD has lost 7%.   There are two major explanations for the weakness. Firstly, demand for the dollar has been particularly strong, with Europe’s troubling sovereign debt and banking crisis triggering a flight to safe-havens where banks are better capitalised, such as the United States and Japan. Secondly, all high-beta currencies have been bashed amidst widespread concern that slowing global growth will weigh on demand for commodities. In the second half of September, base metal prices suffered some very large declines, and the oil price has been sliding precariously. West Texas fell below USD 80 a barrel a week ago, after trading above USD 90 in mid-September. Despite the rapid fall from grace, the Canadian currency has certainly not been singled out. Last quarter, the fall against the dollar of 7.4% was very similar to the likes of the Aussie and the Kiwi. Other high-beta currencies such as the Brazilian real, the Mexican peso and the South African rand endured much sharper declines of close to 15%.

MOF adds to FX intervention firepower. Friday’s series of announcements by Japan’s Finance Minister Azumi reaffirms the continuing alarm felt by the MoF regarding the elevated level of the currency and the ongoing determination to do something about it. The issuance of bills by the MoF to fund intervention has been lifted by JPY 15trln to JPY 165trln (USD 2.15trln), and the requirement for financial institutions to report their market positions to the MoF will be extended until the end of this year. Azumi claimed furthermore that all measures (to prevent further currency gains) were being considered, that currency markets were being closely watched and that USD/JPY between 75-80 was problematic for the fragile Japanese economy. Last month, Japan spent JPY 4.51trln on intervention (around USD 60bln). Unfortunately for the MoF, the Japanese yen continues to be regarded as one of the best safe-haven destinations around. The SNB has spiked the franc’s attraction as a safe-haven (at least for a while) and the gold price has dropped USD 300 in just four weeks. Fighting yen strength will require a lot of fortitude on the part of the MoF.

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