global agenda 88.
(photo credit: )
The financial markets have recently suffered another bout of what might be
called “anti-American sentiment.”
The relative strength of this sentiment
is best tracked via one of two methods: either using the dollar/ euro rate,
because these are the most widely traded currency pair, or by using a dollar
“index,” which is composed of several leading currencies.
Last week, in
particular, the dollar seemed to be virtually in free fall. Against the euro it
dropped as low as 1.385 and looked intent on crossing the 1.40 mark on the way
to its most recent low-point versus the euro, of almost 1.43 in early November.
The most frequently cited dollar index, which is comprised of six other
currencies, was even weaker, falling to as low as 76.88 – within sight of its
low levels of last November, when it almost reached 75.
which had been under way for several weeks and climaxed in the first half of
last week, was accompanied by a renewed chorus of gloom and doom about the
dollar and its prospects, in both mainstream media and blogosphere outlets. The
main theme was that the monetary policy being pursued by US Federal Reserve
Chairman Ben Bernanke is explicitly aimed at creating higher inflation and
therefore strongly implies that the dollar will fall.
policy of buying government bonds in the market, which is effectively printing
money, is creating a flood of liquidity around the world, which is a key factor
pushing up both equity prices and, especially, commodity prices. The latter,
notably those for grains, sugar and other food stuffs, are the cause of the
rising inflation now apparent in many emerging economies.
The bottom line
of all these analyses was that so long as Bernanke sticks to his policies –
which most of the commentators regard as damaging, if not disastrous, for the US
and the world – the decline in the dollar would continue. Indeed, quite a few
warned that if the decline continued, it might well turn into a rout, as
confidence would collapse and panic selling of US Treasuries by foreigners would
However, as often happens in the markets, just when it seems that
a trend is unstoppable, it turns round. Thus it was that in the second half of
last week, especially on Friday, the dollar reversed course and climbed
strongly. Disaster had thus been averted or, at the least,
That set up this week to be potentially very interesting:
Would the dollar continue climbing , or would it fall back? In the event, very
little has happened – which is to say that the foreign-exchange market was
relatively quiet, certainly much more so than in the previous week.
the perspective of technical analysis, all options remain open. But in the
current situation, it is more interesting to consider the fundamentals behind
the foreign- exchange market. On this basis, the rationale for selling the
dollar is very clear: American monetary policy is undermining the country’s
currency, while the huge budget deficit keeps growing, swelling the country’s
debt burden accordingly.
Why should anyone hold dollars? The answer, in
essence, is that the alternatives are even worse. The primary alternative is the
euro, but the problems of the common currency and the disparities between the
countries that use it are now so well-known that most people are convinced the
euro zone will break up before long.
How that will happen and what will
replace the euro are open questions, but they considerably dampen enthusiasm
toward holding the euro.
Other European currencies outside the euro zone,
notably the Swiss franc but also the Norwegian and Swedish kroner, are more
attractive – except that the economic problems of the euro zone inevitably spill
over and affect them. The result is that while these currencies may be
preferable to the euro, they cannot be divorced from its problems, and they tend
to trade in the same direction as the euro, rising and falling against the
dollar along with it, albeit not always to the same extent.
the Japanese yen as the other major currency traded on a large scale (the
Chinese yuan is not freely traded). But Japan has its own basin-full of
problems, starting with a level of indebtedness that makes even the Americans
look solid. Furthermore, the interest rate on the yen is even lower than that on
the dollar, making it unattractive to hold. Finally, it is clear that the
Japanese authorities will intervene in the market to prevent any further
significant appreciation in the yen, which is already near record levels against
both the dollar and euro.
This is the “ugly parade” of the world’s
leading currencies, with investors constantly trying to figure out which one is
worse and changing their positions accordingly.
The dollar has recently
been out of favor, but that can change again as it has in the past –more likely
because of something negative out of Europe than thanks to something positive
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