US Dollar

Despite its multi-year decline, the US Dollar remains the
world’s undisputed reserve currency, claiming a 65% share of total Central Bank
reserves. However, the chorus of soothsayers
proclaiming the apocalypse for the Greenback is growing louder by the day. Every week seems to offer a new piece of news
confirming that the Dollar’s reign is coming to an end. Analysts are drawing parallels between the
British Pound of 50 years ago and the Dollar today. China is threatening to diversify
its reserves into Euros. Iran and Venezuela are leading calls to
price oil in terms of a basket of currencies, rather than in USD. The other members of OPEC are considering
de-pegging their respective currencies from the Dollar. What does all of this mean? Is the Dollar truly in danger of being
replaced as the world’s reserve currency?

The short answer is ‘no.’ The US twin deficits have expanded
every year for the past decade and economic theory suggests that in order for a
nation’s current account to rebalance itself, a decline in the value of its
currency is required. At the same time,
these deficits are sustainable for as long as foreign investors, sovereign and
private, are willing to sustain them. And despite the looming threat of recession, economic data and anecdotal
stories suggests that such investors remain willing to lend their financial
support. For example, the announcement of record-breaking losses by American
financial institutions has been met with solid commitments to invest by
international investors.

In addition, while foreign exchange reserve diversification
is certainly justifiable from a risk management standpoint, it hardly makes
sense from a financial standpoint. The
case could have been made for foreign Central Banks to exchange their Dollars
for Euros and/or Pounds several years ago when both currencies were trading at
relative bargains to the USD. Now that
these currencies are more expensive, it seems harder for to justify buying
assets and securities denominated in them. Furthermore, Central Banks must recognize that diversifying now would be
counter-productive, by sending a wave of panic through the markets and
undermining their efforts. As one
analyst pointed out, Japan and China,
the two largest holders of USD, both have a vested interest in an expensive Dollar.

However, the long answer to the question posed at the beginning
of this article is closer to ‘maybe’ than ‘no.’  In the long-term, Central Banks will certainly
move towards a more diversified portfolio of currencies.  For countries like China and Japan,
this will help minimize risk.  For countries
in the Middle East that peg their currencies to the Dollar, this will enable them
to conduct monetary policy independent of the US.  Ultimately, US capital markets are the most stable
and liquid in the world, and regardless of the value of the USD, it will serve the
interests of Central Banks to denominate a large portion of their portfolios in
Dollars.  Besides, analysts can be
extremely fickle. It was only five years
ago that the Euro was trading below parity with the USD and analysts were predicting
its collapse.  The fundamentals underlying
both currencies have not changed much since then, yet commentators have
reversed their positions. Who knows what
such analysts will be preaching five years from now…

Original post by Jimmy Atkinson and software by Elliott Back

The last two years have witnessed a veritable collapse in
the value of the Dollar, which has declined over 25% against the Euro, alone.  While opinion remains divided, many analysts
are predicting a (temporary) cessation in the Dollar’s downward slide.  The reasoning is that the worst possible
scenario involving the American housing crisis has already been priced into the
Dollar.  Furthermore, experts argue that
the inevitable loosening of American monetary policy will help boost the
American economy by preventing it from slipping into recession. Finally, there is the notion that China will
begin to take steps to appreciate its currency relative to the Euro, which has
actually risen against the RMB.  The law of
triangular arbitrage requires that any rise in the Euro against the Yuan must be
matched by a proportional rise in either the Dollar/Euro or the Dollar/RMB rate,
the latter of which seems unlikely.  Dow Jones reports:

There is also the possibility that official Chinese
purchases of the euro could decline after last week’s visit by a delegation
from the European Central Bank to Beijing, anxious to reduce upward pressure on
the single currency.

Read More: Chances Of Dollar Bounce May Be Rising

Original post by Jimmy Atkinson and software by Elliott Back

In recent speeches, two high-ranking officials from

America

’s
Federal Reserve Bank gave conflicting indications regarding the likelihood of
rate cuts next month. Both officials were deliberately ambiguous in their
speeches, though one went so far as to rule out a rate cut while the other
hinted at its inevitability. Nonetheless,
analysts used the speeches to buttress their conclusion that a rate cut is
probable. In fact, the futures market
has priced in a 94% chance that rates will be cut by 25 basis points at the
next meeting, on December 11. Likewise,
it seems a rate cut has already been priced into the USD, which was virtually unaffected
by this story. MSNBC reports:

On the currency markets, the heightened expectations of a US
rate cut cut did little to hurt the dollar, as investors took the view that the
currency’s recent weakness had gone far enough.

Read More: Fed stance sends equities soaring

Original post by Jimmy Atkinson and software by Elliott Back

Earlier this week, we reported that the members of OPEC are
mulling the possibility of pricing oil contracts in a basket of currencies,
rather than solely in Dollars.  In a
related move, the members of the Gulf Co-operation Council (GCC) are also
rethinking their exchange rate policies. Currently, the members of the GCC, consisting of United Arab Emirates (UAE),
Saudi Arabia, Kuwait, Qatar, Oman and Bahrain, all currently peg their
respective currencies to the Dollar, in some form or another.  However, this policy is being scrutinized as a
result of the falling Dollar, which has dragged down GCC currencies
proportionately and triggered double-digit inflation.

In fact, Kuwait
has already de-linked its currency from the USD and instead pegged it to a
basket of currencies, so as to give it more flexibility in conducting monetary
policy.  This represents the most likely
course for the rest of the GCC, since it would allow them to maintain exchange rate
stability while increasing their flexibility in conducting monetary policy.  This policy change, combined with the
potential switch in oil pricing among OPEC nations, bodes ill for the
Dollar. At the very least, it would
result in decreased demand for USD and for Dollar-denominated assets. At worst, it would result in active
diversification, of rotating foreign exchange reserves into assets denominated
in other currencies, to support the new peg.

Read More: Countdown to lift-off

Original post by Jimmy Atkinson and software by Elliott Back

Currency traders who have done their homework are no doubt
well aware that one of the countervailing forces to the Dollar’s decline is the
so-called petrodollar phenomenon.  In
short, because oil contracts are settled in USD, the global demand for USD is
held artificially high.  However, due
primarily to the rapid decline of the Dollar, the members of OPEC are studying
the feasibility of pricing oil in terms of a basket of currencies, rather than
solely in terms of Dollars. This
proposal is still in the earliest stages of planning, and it’s not yet clear
exactly how it would work.  One thing is certain: if such a change were
implemented, the decline of the Dollar would accelerate.  OPEC is scheduled to hold several high-level
meetings over the next month, which should produce further developments. Reuters reports:

Venezuela’s
Energy Minister Rafael Ramirez said…“The need to establish a basket of
currencies … will probably be a point of discussion in the next OPEC summit.”

Read More: OPEC to study currency basket for pricing

Original post by Jimmy Atkinson and software by Elliott Back

In a recent speech, a prominent Federal Reserve Board governor strongly hinted that the Fed would maintain US interest rates at current levels at the Fed’s next meeting.  The Fed is caught in the delicate position of trying to balance economic growth with the specter of inflation.  While technically the Fed is always trying to meditate between these two outcomes, its current position is especially tenuous since the US economy is trending downward while inflation trends upward.  Despite the emphatic claims to the contrary, futures markets are still pricing in a rate cut, setting the stage for a showdown with the Fed.  As usual, the Dollar’s fate hangs in the balance.  The Financial Times reports:

Mr Kroszner said that in the near term "the economy will probably go through a rough patch" with falls in house prices, home construction and subdued consumer spending. He did not rule out a future cut in rates.

Read More: Fed and markets set to clash

Original post by Jimmy Atkinson and software by Elliott Back

In fact, China may have to increase its exposure to the dollar, according to the comments of Brad Setser of the Council of Foreign Relations: "In my mind, so long as China resists more rapid appreciation of the renminbi versus the dollar, it’s rather difficult for China to diversify in any meaningful way against the dollar. If China really started to diversify away from the dollar, I think it’s a big enough player that it would put downward additional pressure on the dollar."

And additional downard pressure on the USD should be what China is trying to avoid. China, being the largest exporter to the U.S. does not want to see appreciation of its currency against the USD, as that would make its goods more expensive (and therefore less competitive) in America.

In fact, Setser goes on to say that in order to prevent the USD from sliding even further downward against the RMB, China would have to not only retain its present stock of USD, but in fact buy even more.

Read more: Can China Dump the Dollar?

Original post by Jimmy Atkinson and software by Elliott Back

A recent speech by Ben Bernanke, chairman of the US Federal Reserve Bank, sent the Dollar spiraling downward to fresh lows against all of the world’s major currencies.  This is perhaps surprising, given that Bernanke used the speech to warn that higher-than-expected inflation may drive the Fed to hike rates, which is exactly what Dollar bulls wanted to hear.  The downside of the speech, reflected in the markets’ reaction, was that the primary cause of the inflation is rising oil prices, would could plunge the US economy into stagflation: slow growth and high inflation, an unenviable position if there ever was one.  Forbes reports:

Rhonda Staskow at Thomson’s IFR Markets said: ‘There is no Goldilocks
scenario from Bernanke, who sees risks from inflation and an economic
slowdown - the worst of both worlds.’

Read More: Dollar sinks after Bernanke speech

Original post by Jimmy Atkinson and software by Elliott Back

The European Central Bank (ECB) will likely maintain its benchmark interest rate at 4.00% at its meeting his week.  The Bank of England is also expected to hold its lending rate in place, at 5.75%.  While these two moves should be seen by Dollar bulls as acts of clemency, they are more akin to a stay of execution than to a commutation of its death sentence.  The reasoning is that it is inevitable that the US-EU interest rate difference will be bridged over the next few months, as the Fed continues to lower rates while the ECB is in the process of hiking them.  The only question is when.  Accordingly, analysts will be paying close attention to the language employed by the heads of the various Central Banks at their next meetings to get a sense of timing.

Read More: Dollar hovers above lows

Original post by Jimmy Atkinson and software by Elliott Back

A high-ranking official in China’s government recently gave a
speech urging the Central Bank to (continue to) diversify its vast holdings of
foreign exchange, currently estimated at $1.4 Trillion and rising.  The speech was atypical in its level of directness,
as Chinese officials tend to speak with a certain degree of circumspection if
they think there is any possibility that their comments will reach the
public. Specifically, he advocated making
a play on the current volatility in forex markets, by selling “weak currencies”
in favor of “strong currencies.”  In
fact, the most recent data shows that China is already doing just that: its holdings of US government bonds have declined
even as its reserves have risen.  The Financial
Times reports:

Although he later tried to play down his comments, saying he
had not been speaking in an official capacity, the damage was done.

Read More: Dollar sinks to new lows

Original post by Jimmy Atkinson and software by Elliott Back

The Dollar is still reeling from the 50 basis point rate cut
imposed by the Fed last month. Nonetheless,
some analysts are predicting that the Fed will cut rates again on October 31,
this time by a quarter of a percentage point, to 4.5%. The looming fall in real estate prices
(termed the sub-prime crisis) has officially spread to the rest of the economy,
and the Fed is trying to preempt a complete collapse in investor and consumer
confidence.  Experts remain divided as to
whether the Fed will cut rates now or next month. Either way, you can expect the Dollar to drop
to fresh lows against the Euro.  Thomson
Financial reports:

“The combination of weak US data, rising expectations of
aggressive Fed easing and a stable, albeit fragile, Wall Street is a perfect
recipe for euro-US dollar and Australian dollar-US dollar strength,” said one
analyst.

Read More: US dollar hovers near all-time low vs euro on
chances of Fed rate cut

Original post by Jimmy Atkinson and software by Elliott Back

In an official G7 press release, US Treasury Secretary Henry
Paulson proclaimed that the US
would continue to pursue a “Strong Dollar” policy. While this remark was certainly anticipated
and probably even appreciated, by representatives from the EU, analysts have
been quick to mock. Their point, which
is well-taken, is that it seems ridiculous for the US to insist that it supports a
strong Dollar when economic fundamentals support a continued decline. The current account deficit is not
retreating, interest rates are being lowered, and the credit crunch threatens
to collapse the US housing and stock markets. Meanwhile,
the USD has declined in five of the last six years, and the Bush administration
has not made any serious efforts (beyond rhetoric) to intervene on its behalf,
leaving market participants chuckling and scratching their heads when they hear
“Strong Dollar.” Reuters reports:

Paulson even before he became Treasury secretary said
publicly that the dollar would have to weaken to ameliorate the U.S. trade
shortfall. So his maintaining a strong-dollar policy may reflect a more global perspective…

Read More: Markets see U.S. policy of "ignore the dollar"

Original post by Jimmy Atkinson and software by Elliott Back

At last week’s G8 meeting in Washington, it was expected that currencies would be a hot topic of discussion.  With the Dollar retreating to record lows on a daily basis, the failure of China to allow the Yuan to appreciate, the Japanese Yen’s continued weakness despite its strong economy, and the recent parity of the Canadian Dollar and USD, there are certainly plenty of forex phenomena that deserve attention.  However, it is the Euro/USD relationship that probably received the most scrutiny, as the biggest contingent of the G8 uses the Euro.

European politicians and bureaucrats have spent the last few months arguing with America-as well as amongst themselves-over the declining Dollar.  The consensus is certainly that the Dollar is harming the European economies; as one German Minister phrased it, the “pain threshold” has been crossed.  At the same time, it is clear that a relatively weak Dollar is probably in the best interest of global economic stability, since the US current account and financial account imbalances can only be solved by changes in exchange rates.  Thus, there is a growing divide between European politicians, who tend to think in provincial terms, and the European Central Bank, which is more focused on the Big Picture.  The new President of France, for example, has been quite vocal in lamenting the appreciation of the Euro, even going so far as to demand the ECB step in.  Jean Claude Trichet, president of the ECB, responded by calling on European politicians to be circumspect in their comments on the Euro.

However, since Central Banks do not participate in G8 conferences, you can bet that politicians hounded Hank Paulson, US Secretary of the Treasury, on the declining Dollar.  Some analysts have even speculated that ‘intervention’ would enter into the discussions. In fact, the US has not intervened in forex markets since 1994, when Europe and American worked in tandem to prop up a then-ailing Dollar.  After a couple months, however, the plan was abandoned due to mixed results.  Is it possible that the US, confronted with the same situation, will once again attempt intervention?

The answer is “not likely.”  First, the Europeans are not even united in their position on the USD/Euro exchange rate.  Secretly, they would probably all prefer a stronger Dollar, but in public, only a handful have called for intervention.  Second, short of fixing the exchange rate (which would require the US to borrow money), it is very difficult for a government/central bank to control its currency.  Recent intervention by South Korea and Japan, as well as America’s efforts in 1994, ended in failure. Finally, there is the issue of China, which does control its currency.  The US would surely appear hypocritical if it intervened on behalf of the Dollar while simultaneously encouraging China to float the Yuan.  Thus, while certain US economic concessions may result of the G8 conference, a controlled appreciation of the Dollar will not likely be one of them.

Original post by Jimmy Atkinson and software by Elliott Back

The Dollar has been sliding steadily for close to a year,
and Wall Street has been rushing to introduce a spate of new investment
products to help investors profit accordingly.  For those who do not want to trade currencies
directly, Exchange Traded Funds (ETF’s), probably represent the best
alternative. The typical currency ETF tracks a basket of currencies and most ETFs
are characterized by low fees.  In fact, over
$2.7 Billion is currently invested in such ETF’s, which have risen from virtually
nothing over the last 7 years. Another
option is to buy CDs or other money market instruments denominated in other
currencies. Online banks such as
Everbank offer such products. Yet
another option is to buy shares in mutual funds that aim to mimic the returns
offered by investing directly in foreign money market instruments.  Finally, one can simply buy shares in foreign
companies or in American multinational companies that do significant business
abroad.

Read More: Opinion divided on currency trading

Original post by Jimmy Atkinson and software by Elliott Back

It seems the collapse of the USD is quickly spreading; the Korean Won has become the latest currency to cash in on the sagging Dollar.  As with regard to other currencies that have risen against the Dollar, forex analysts are not attributing the Won’s rise to strength in the Korean economy, but rather weakness in the US economy.  It is also worth noting that previously, when the Won rose sharply against the Dollar, the Korean government moved quickly to intervene in forex markets in a vane attempt to protect the export-dependent Korean economy. However, as the Won inevitably continued to rise, the government incurred massive losses, essentially for naught.  As a result, analysts expect the Korean government to remain on the sidelines this time around.  The Korea Times reports: 

"Other than verbal intervention, it will be difficult for the government to actually meddle in the market to help stop the won’s appreciation."

Read More: Dollar’s Demise Means Mightier Won

Original post by Jimmy Atkinson and software by Elliott Back

Alan Greenspan, former President of America’s Federal Reserve Bank, gained notoriety as well as universal trust based on his perceived ability to conduct monetary policy in exactly the way that the US economy demanded.  It was initially thought that his successor, Ben Bernanke, who has been in office for over a year, would have a more difficult time facilitating economic growth and avoiding recession because his primary goal was to control inflation. In practice, however, the two leaders have conducted monetary policy in much the same way, balancing the dual risks of inflation and unemployment. Thus, even though inflation remains above the Fed’s comfort zone, Bernanke engineered a 50 basis point rate cut at the last meeting of the Fed in order to avoid economic recession.  However, whether the Fed will prioritize unemployment (rate cuts) or inflation (rate hikes) is anyone’s guess.  Dollar bulls will no doubt be watching with bated breath, praying that he prioritizes inflation.  The New York Times reports:

“Where Greenspan had to hold off raising rates when the economy was strong. Bernanke’s challenge will be to hold off cutting rates when the economy slows down.” 

Read More: In Crisis, 2 Fed Chiefs Seem Alike

Original post by Jimmy Atkinson and software by Elliott Back

Over the last five years, the Canadian Dollar has slowly
climbed to parity against the USD, finally reaching the mythical 1:1 exchange
rate last week. Canadian shoppers and
American tourists have taken notice, gradually adjusting their behavior in
accordance wit their changing purchasing power. For many Canadians, this has translated into more frequent shopping
trips across the border, whether for gasoline or for clothing. For Americans, this has resulted in a decline
in the number of tourists visiting Canada. It is also slowly redefining the US-Canada
trade dynamic. However, as Canada has become the United
States’ largest supplier of oil, it is likely Canada that will
benefit most in this relationship. The
New York Times reports:

The weakness of the American dollar worries some Canadian
investors as well as businesses that rely on American customers.

Read More: Currency
Parity Brings Canadian Shoppers South

Original post by Jimmy Atkinson and software by Elliott Back

When the US Dollar eclipsed its previous record low against
the Euro last week, commentators immediately began painting doomsday scenarios
for the beleaguered currency. On paper, the argument for a continued decline in
the Dollar is quite strong, due to a sagging economy, surging current account
deficit, the prospect of lower interest rates and turmoil in US capital
markets. But, in practice, the Dollar remains the world’s de facto reserve
currency, which begs the question: “how much-if at all-will the Dollar decline?”

Let’s begin by examining the state of the US economy.  At this point, economists have clearly
identified the housing/real estate sector as a major weakness in the US economy.  Instability and an overall lack of demand have
contributed to falling prices for real estate, which is eating into consumers’
disposable income, and hence threatens to bring down the rest of the economy.  In fact, the most recent employment data, which
has become the most-watched piece of economic data in recent years, signaled
that for the last 3 months, no new jobs were created in America, which
is a tremendous cause for concern.

As a result, it is all but certain that the Federal Reserve
Bank will lower its benchmark interest rate at its next meeting, perhaps by as
much as 50 basis points.  While this may
soften the impact of the sagging housing market on the rest of the economy, it
will also decrease the EU-US interest rate differential to only 75 basis
points. In addition, the European
Central Bank will likely raise rates at its next meeting, which means the
differential will be further reduced.  Combined
with general instability in US capital markets, brought on by weakness in
mortgage-backed securities, foreigners are beginning to grow wary of investing
in the US.
While a US economic recession would decrease imports and perhaps stem the growing trade
imbalance, foreigners may still decide that it is too risky to continue financing
the US trade deficit.

On the other hand, many Dollar bulls insist (correctly) that
the Dollar remains the world’s reserve currency, and serves as a safe haven in
times of global economic instability.  And
in fact, the Dollar initially appreciated in value despite the turmoil in its
securities markets. However, this upward
trend seems to have been the result of a temporary shunning of risk, and since
then, the Dollar has resumed its fall.  In
short, both in theory and in practice, the evidence suggests that the Greenback
can still fall much further against the world’s major currencies.

Original post by Jimmy Atkinson and software by Elliott Back

The Brazilian Real is one of a string of currencies which is
rising against the USD on the heels of speculation that the Federal Reserve
Bank will cut US interest rates at its next meeting. If
the meeting conforms with market expectations, the Fed will cut the benchmark federal
funds rate by 50 basis points, to 4.75%. Such a move would further widen the gap between American and Brazilian
interest rates, which are currently among the highest in the world.  The Brazilian Real has already climbed 10.5%
against the USD during 2007, a run which should continue if the Brazilian
economy further outperforms the US.
Bloomberg News reports:

“Markets pressing the Fed for a rate cut will remain the
story in global currency markets for a few more days,” said a local trader of Brazil’s
foreign debt. “A rate cut would allow investors in Brazil to focus on the
fundamentals, which point toward a stronger currency.”

Read More: Brazil’s Real Advances on Bets U.S. Will Cut Rates Next Week  

Original post by Jimmy Atkinson and software by Elliott Back

The Federal Reserve is expected to reduce US interest rates on September 18. This is in response to the growing credit issues within the country, as well as a weakening job market. The rate cut should spark a global reaction. Domestically, it has already increased the US dollar. Reports Forbes:

There remains downside risk for the US dollar, but the worst appears to
be over unless there are more shockwaves from global stock markets, GFT
senior finance analyst Ian Copsey said.

Read more: US dollar steady as traders digest weak jobs data, Fed rate cut seen

Original post by Amy Cottrell and software by Elliott Back

August reports show that the US lost 4000 jobs in one month. The biggest employment slump in several years, it appears that problems with the subprime market are affecting more people than ever. The dollar fell to a 30-day low after these reports went public. According to Reuters:

The euro vaulted to a one-month high of $1.3768 <EUR=>
after the report before easing to $1.3751, up 0.5 percent. The
dollar was down 0.8 percent at 114.42 yen <JPY=>, near a
session low of 114.31 yen.

Read more: Dollar tumbles as August U.S. payrolls contract

Original post by Amy Cottrell and software by Elliott Back

Credit problems in the US have been the source of much turmoil throughout the global markets in the past few months. Tuesday was good for the US dollar, which held strong against both the yen and the euro. However, forthcoming economic reports from the US may or may not tip the scales. According to Reuters:

"The panic is almost over, but the market has lost its direction and is
waiting for more news, especially any good news," said Kikuko Takeda, a
currency strategist at Bank of Tokyo-Mitsubishi UFJ.

Read more: Dollar drifts as U.S. data awaited for direction

Original post by Amy Cottrell and software by Elliott Back

Reports from Tokyo indicate that the US dollar is holding steady in Asia as of Monday morning. After receiving promising reports from the west, recent fears about the US credit problems have alleviated and risky trades have resumed in Asia. Since then, the dollar has strengthened considerably. The Philippine Star reports:

The better US economic news slightly pared back market expectations
that the US Federal Reserve will cut its benchmark interest rate next
month, dealers said.

Read more:Dollar steady in Asian trade

Original post by Amy Cottrell and software by Elliott Back

Reports from Tokyo indicate that the US dollar is holding steady in Asia as of Monday morning. After receiving promising reports from the west, recent fears about the US credit problems have alleviated and risky trades have resumed in Asia. Since then, the dollar has strengthened considerably. The Philippine Star reports:

The better US economic news slightly pared back market expectations
that the US Federal Reserve will cut its benchmark interest rate next
month, dealers said.

Read more:Dollar steady in Asian trade

Original post by Amy Cottrell and software by Elliott Back

Bank of Japan governor, Toshihiko Fukui, has expressed a desire to keep credit rates low in Japan. His aspiration to stabilize interest rates has had a positive effect on the US Dollar in Japan, reports from Tokyo are showing. While many global markets are reeling from the subprime credit problems in the US, Japan is remaining calm and forgoing a reactionary rate hike. Forbes reports:

‘I understand that global credit markets are now in the process of
re-pricing risk, and we need to see if the current re-pricing proceeds
in an orderly fashion, or if it develops in a disorderly manner,’ Fukui
said.

Read more: US dollar higher in Tokyo as no quick rate hike seen in Japan

Original post by Amy Cottrell and software by Elliott Back

Despite the effects of US subprime mortgage troubles on the rest of the world, investors have scaled back risky ventures and increased the value of both dollar and yen. While this result may be inadvertent, it is much appreciated by those who have lost major funds in the stock market recently. The future doesn’t look any brighter for US mortgage, either. According to Hemscott:

Housing starts sank 6.1 pct in July to a 1.381 million unit annual rate, the
lowest since January, while building permits — a more forward-looking indicator
– fell 2.8 pct to a 1.373 million rate, the lowest since October of 1996.

Read more: Dollar and yen continue higher amid flight to safety

Original post by Amy Cottrell and software by Elliott Back

Despite the problems affecting currencies worldwide on Friday, the dollar is holding strong against the yen, franc and pound sterling. Although last week’s struggle affected Europe and Australia the most, the Australian dollar is expected to rally with the US dollar. Today may prove less promising for the US once things settle down. For now, however, it is considered stable for traders. Forbes reports:

…each day will be a test for the US dollar although the
greenback has gained some support on demand for US Treasuries as a safe
haven investment due to their triple-A rating and high liquidity.

Read more: Dollar slightly firmer in Asian afternoon trade, awaiting fresh leads

Original post by Amy Cottrell and software by Elliott Back

Most Dollar bulls cringe when they hear the word “diversification.”
Within the context of forex,
diversification usually refers to the shift towards non-Dollar denominated
assets among Central Banks.  The thinking
is that with the declining Dollar, it probably makes sense to hold reserves in
non-US investments.  However, analysts
have begun to realize that this only represents a small segment of entities
that could harm the Dollar by diversifying.  The world’s Central Banks probably hold at
most $5 Trillion of reserves, whereas US institutional investment funds
probably have over $20 Trillion collectively invested in US assets.  Thus, diversification in this segment probably
poses a much greater threat to the long term health of the USD.  The Economist reports:

American mutual funds have gradually increased their
overseas allocation of equities since 2003 from 15% to 22.5% of assets. If this portfolio shift mirrors the behaviour
of all pension, insurance and mutual fund managers, it would imply an outflow
from dollar assets of $1.16 trillion since 2003.

 
Read More: Soft currency

Original post by Jimmy Atkinson and software by Elliott Back

The story behind the Dollar’s decline contains two threads:
narrowing interest rate differentials and growing concerns surrounding the US
economy. With most of the
industrialized world’s Central banks not scheduled to meet again for a few
weeks, the interest rate story can temporarily be placed on hold in favor of
the economic story, which is becoming uglier every day. The centerpiece remains the US housing
market, which many analysts believe will soon slide into a major rut.  There is a great deal of uncertainty over
whether homes can retain their value and if borrowers will be able to pay off
their mortgages. Rising rates have
squeezed many low-income, high-risk borrowers, causing a crisis of growing
proportions in the market for mortgage-backed securities, which is at risk for
spreading to other areas of securities markets. Forbes reports:

“Credit concerns, rating reviews, yields tumbling; it has
been one-way traffic against the dollar in recent minutes and euro/dollar has
rallied up a fresh all-time high.”

Read More: Dollar slump sends euro
to record high

Original post by Jimmy Atkinson and software by Elliott Back

These days, the US economy seems to rise and fall on the wings of the housing sector.  Unfortunately, this sector is in a tailspin as higher interest rates have left many homeowners unable to pay their mortgages, causing a crisis in the oft-cited subprime market.  Already, several hedge funds have nearly collapsed due to subprime mortgage uncertainty, and nearly 600 portfolios of subprime mortgages (representing $12 Billion) have been downgraded as a result of declining creditworthiness.  Investors fear that instability in the subprime market could spread to the rest of the US economy and/or drive the Federal Reserve Bank to lower interest rates, which would narrow the interest rate differential between the US and most of the west.  Reuters reports:

Lower U.S. bond yields arising from problems in the subprime sector have diminished the allure of U.S. Treasury debt. The yield on the benchmark 10-year U.S. Treasury note…is at 5.08 percent, down from about 5.29 about a month ago.

Read More: Dollar hits record low vs euro on subprime woes

Original post by Jimmy Atkinson and software by Elliott Back

Most commentators assume that the only thing currently
keeping the USD afloat is high interest rates. While attractive rates have certainly encouraged an inflow of (risk-averse)
foreign capital in the short term, they may ultimately be harming the currency in the
long-term. In fact, the economic law of interest
rate parity dictates that currencies and interest rates should move away from
each other in the long term. Stated
differently, high interest rates should imply a less valuable currency. Since US rates are among the highest in the world, the USD should decline in the long term in order to compensate US investors in foreign securities for the lower risk-free returns they are implicitly accepting.

The reasoning is simple enough: since the advent of currency
futures, traders have been able to speculate on future exchange rates. In order for futures to be priced fairly
(such that arbitrage is impossible) the difference between a currency’s current
value and its implied future value should perfectly equal the difference
between domestic interest rate levels and international interest rate
levels. In the case of the US, bets on
the USD made during the recent period that US interest rates have exceeded European
and British inte