ft.com/alphaville

There are deeper dynamics than first meet the eye to the current bout of dollar weakness, writes the FT’s John Authers in Friday’s Short View column. As of midday Thursday in New York, one US dollar would only buy you 99.99 Canadian cents. It is more than 30 years since the Canadian and US dollars were last at parity, he notes.But this is only a symptom of the fall-out from this week’s sharp Federal Reserve rate cut to 4.75 per cent. That sparked some life into the money and credit markets, as can be seen in the return of high-yield bond issuance and sharp falls in US interbank lending rates.

A further sharp contraction in the commercial paper that US companies issued this week combines with stubbornly high interbank lending rates in Europe to suggest that “the squeeze is not over,” warns Authers, adding: But it looks likely the rate cut will succeed in its aim of getting the world financial system through its short-term crisis.

The dollar’s travails illustrate the possible long-term consequences. An unexpected rate cut weakens a currency - it lowers interest rate differentials, making dollar assets less attractive for foreigners, and it increases risks of inflation.

But the dollar is caught up in deeper dynamics, he says.

The news that pushed the dollar lower on Thursday came from Saudi Arabia, where the central bank, which has pegged its currency to the dollar, decided not to follow the Fed by cutting by 50 basis points. That prompted speculation that the Saudis no longer want to peg to a currency in freefall.

Further, a long-term link between the dollar and the oil price has broken down. A high oil price used to mean a strong dollar as oil exporters put their money in dollars. But now we have record crude prices and the weakest dollar in decades.

ABN Amro shows that oil exporters’ imports from the US are falling, as is the share of their reserves in dollar-denominated assets, notes Authers. Rising oil prices give petrodollars ever more weight. The measures taken to get through the money market squeeze, he concludes, “may hasten their move away from the dollar”.