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HomeThe U.S Dollar is Diving
Posted by Larry Doyle on September 8th, 2009 4:32 PM |
Is the U.S. dollar losing its luster as the world’s international reserve currency? If today’s price action is any indication, the greenback is chugging along like a tired old caboose.
The U.S. dollar index is down a full 1% on the day and making multi-year lows against a wide array of other currencies. Our friendly Wall Street Journal Market Data Currency page provides a useful snapshot of our tired old greenback (click on image for larger chart):
Why is the dollar giving so much ground?
1. perception that the U.S. economy is in tougher shape than other economies around the world.
2. perception that these other economies will be forced to raise rates sooner than the Federal Reserve will raise rates here in the U.S.
3. traders are borrowing U.S. dollars at 0-.25% and using them to invest elsewhere in what is known as the ‘carry trade’ otherwise known as utilizing leverage.
4. continued concern about the viability of the U.S. dollar as the world’s international reserve currency.
The Wall Street Journal offers an interesting perspective on this development in writing, Dollar in a Funk as Traders Bet on Slow Rebound:
Currency analysts say the dollar’s slide has room to run now that it has broken free of recent trading ranges. Several are predicting the euro will test $1.50 by the end of the year. Mr. Mackel also sees continued strength, in particular, for the Australian dollar, which is backed by a healthy economy and exposure to a rebounding China. He says the Aussie currency could reach near parity with the U.S. dollar by the end of 2010. Early afternoon Tuesday it was trading at US$0.8641, up from US$0.8560.
Friday’s U.S. jobs report was a significant factor in the dollar’s fall. The U.S. unemployment rate hit 9.7% in August, and that means the Federal Reserve will likely keep interest rates low for the foreseeable future.
I maintain that our leaders in Washington are not unhappy with a weaker dollar. Why? A weaker currency will help promote greater exports as our products appear cheaper. Additionally, it is a means toward generating inflation and effectively monetizing our growing deficit. That said, how do the wizards in Washington stop the slide of the dollar and generate only a whiff of inflation?
The simple fact is a decline in the dollar is a global statement of lessened confidence in the American economy as the driver of global growth.
That is reality.
LD
The Greenback is Getting Some Chinese Competition
Posted by Larry Doyle on September 8th, 2009 12:57 PM |
The BRIC nations (Brazil, Russia, India, China) have certainly not been bashful in promoting the need for some competition in the greenback as the international reserve currency. Is that competition going to escalate as China issues yuan-denominated bonds for the first time? Major high five to MC of Investor Rebellion for bringing this developing story to my attention.
The Business Insider writes, Dollar Threat: China Selling Yuan Bonds for the First Time:
In yet another step to internationalize the yuan as a global currency, China will be selling yuan-denominated bonds on the international market for the first time.
This could be a new option for fixed-income investors, including central banks, who want to diversify away from the dollar.
AP: The 6 billion yuan ($876 million) bond sale is slated for Sept. 28, the ministry said. Hong Kong is Chinese territory but has its own currency and regulatory system and often is used by Chinese companies to deal with foreign investors.
The yuan, also known as the renminbi, or people’s money, does not trade on global markets despite China’s huge foreign trade, but Beijing is gradually expanding its use abroad.
It will be interesting to see what yield these bonds end up offering, and if central banks bite.
Given the consensus view that the yuan is artificially undervalued versus the dollar, longer-term Chinese bonds are likely to be appealing for their currency appreciation potential, in addition to their interest income. We expect a strong a response.
This development is very meaningful and bears watching. Questions and concerns I would have for investors include: (more…)
Will Japan Take a Samurai to the U.S. Dollar?
Posted by Larry Doyle on July 13th, 2009 11:51 AM |
Is the economic influence of the BRIC nations (Brazil, Russia, India, and China) gaining momentum and a huge ally in the assault on the U.S. dollar? It would appear so. What country is also questioning the validity of the greenback as the international reserve currency? Our second largest creditor, that being Japan.
Bloomberg highlights, DPJ’s Nakagawa Says Japan Should Diversify Reserves:
Japan’s opposition party, leading in polls ahead of next month’s election, said the nation should consider shifting its $1 trillion of foreign reserves away from the dollar and buying International Monetary Fund bonds.
“In the medium to long term, we need to do what we can to avoid the risk of currency losses or economic turbulence that could result if the dollar were to swing,” Masaharu Nakagawa, the shadow finance minister in the Democratic Party of Japan, said in an interview in Tokyo on July 9. “Many countries are starting to diversify their reserves.”
When nations that are not exactly strong allies call for a change in the sovereignty of our U.S. dollar as the international reserve currency, that is one thing. When leaders of leading political parties within nations closely allied with the United States do the same, that is an entirely different issue.
Clearly, Nakagawa sees the shift in momentum away from the dollar and is looking to curry favor with the BRIC nations. However, make no mistake, current holders of U.S. dollars and dollar denominated assets face a real predicament if the dollar weakens. How do these nations diversify their holdings while protecting their existing dollar positions?
1. They would have to sell dollars or dollar denominated assets which would depress the value of their remaining positions. Not exactly an appealing proposition.
2. They would have to stop purchasing or significantly cut back their purchases of dollars and dollar denominated assets. This maneuver would also depress the value of their positions and is also unappealing.
Is there a third means for these nations to gain diversity? It would not necessarily seem so. However, Japan’s Nakagawa believes there is another means. Bloomberg highlights:
Nakagawa, 59, said Japan’s government should ask the U.S. to sell debt denominated in yen, so-called samurai bonds, as a way to diversify reserves and promote the globalization of the yen.
Wow!! Are we turning Japanese? (more…)
London Calling: LIBOR Revisited and The Greenback
Posted by Larry Doyle on May 24th, 2009 8:27 AM |
The biggest developments in the market and economy this week were the decline in the value of our greenback and the move higher in long term interest rates (10yr U.S. government bonds moved to 3.46%, a level not seen since last Fall).
Despite these concerns, many analysts will point to the drop in Libor (London interbank overnight rate) as an indication of the increased confidence in the global banking system. I strongly disagree.
I believe the drop in Libor is not a reflection of the “fundamental” improvement in our global banking system, but rather a “technical” reflection of the supply of dollars that have been injected into the global economy. There is an enormous difference in these lines of reasoning and the implications they have for our markets and economy going forward.
If Libor were declining because of a “fundamental” improvement in the global banking system, it would be reflected in an increased flow of credit into the economy. That flow is not happening.
If Libor is declining because of a “technical” supply of dollars, then it would be reflected in a decline in the value of the dollar, an increase in long term interest rates, an increase in the prices of select commodities (gold has rebounded to $957/oz, oil is back above $60/barrel), and other inflation-related variables. Yes, we are seeing all of these developments.
Let’s revisit my post from May 15th, What Is Going On With Libor?
While many analysts were promoting the drop in Libor as a positive, I begged to differ and wrote:
Has the drop in Libor coincided with an improvement in the credit markets? No. Despite what pundits would tell you, credit spreads remain at elevated levels. In fact, on an inflation adjusted basis, rates are at the highest levels since the early 1980s.
Why aren’t banks lending as much? Lack of confidence in the economy along with enormous embedded losses in their current book of loans. Those losses are real and will be rising. The elusiveness of bank credit is highlighted in a McClatchy article, Businesses Struggle as Bank Loans Remain Elusive, in the Newsworthy section of Sense on Cents.
Thus, if a drop in Libor is not a reflection of improved credit conditions, what does it mean?
In my opinion, it is a precursor to a drop in the value of the dollar. Why?
Very simply, too many greenbacks floating around. A decline in the value of the dollar is inflationary. Both core rates of producer prices and consumer prices reported this week were higher than expected. I’ll be watching.
Please recall, there are always three factors that determine the level of a market: fundamental, technical, psychological. A move in Libor is almost always analyzed from a fundamental standpoint. However, in our Uncle Sam economy, we need to be increasingly diligent in reviewing all three of the aforementioned factors along with the implications they have for our global markets as we navigate the economic landscape.
LD
P.S. In light of the Memorial Day holiday, I will not be hosting NQR’s Sense on Cents with Larry Doyle this evening. I look forward to getting back at it next week. If you have any questions or topics you would like addressed, please do not hesitate to leave them and I will respond. Enjoy!! LD
What Does A Declining Dollar Mean?
Posted by Larry Doyle on May 22nd, 2009 11:21 AM |
On the heels of comments yesterday by Bill Gross of Pimco that the implied AAA credit rating of the United States will eventually be downgraded, our dollar is being hit hard again today. Let’s address some questions about a weaker dollar:
1. What are the implications of a weaker dollar?
– more expensive to travel overseas
– higher inflation here at home
– perceived greater risk of holding the currency and dollar denominated assets
– given the greater perceived risk, investors will demand a higher rate of return. In other words, interest rates will head up (and are currently, especially longer maturities).
2. What are the risks?
– significant exit of foreign capital from our market. Can you imagine the conversations going on around the world, but especially in China and Japan the two largest foreign holders of our debt?
– as our economy is forced to pay higher rates to attract capital, the economy slows as the cost of debt service increases.
3. Are there benefits?
– in a perverse way, I think our political leaders actually want a somewhat weaker dollar. Why?
– A weakened dollar will help domestic production of goods relative to our continued reliance on imports.
– generating some inflation is a de facto means of devaluing our outstandng massive amount of debt. Whomever is in debt currently can actually pay back those debts in future dollars that are worth less.
– however, having the dollar decline in value marginally is akin to getting a little bit pregnant.
4. How do you stem the decline in the value of the dollar?
– increase short term interest rates, that is, the Federal Funds Rate (currently sitting at 0-.25%) will have to go higher. What does that mean? Higher rates lead to a slowing economy. Although given the current economic turmoil, the Fed may have to increase the Fed Funds rate even sooner than they desire and we could suffer through a nasty bout of STAGFLATION.
Playing with the valuation of the currency and not defending it is a VERY dangerous game.
LD
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