While global stock markets surged on Monday, the dollar and the yen, seen in the past seven months as havens for investors fleeing equities turmoil, tumbled. As the FT reports, the US currency on Monday fell to its lowest level since October against a basket of currencies. Sterling, meanwhile, rose 1.1 per cent to $1.6907 against the dollar, a 10-month high, amid predictions that its uptick will be short-lived.
Commodities prices, meanwhile, rose across the board to their highest for the year, boosted by resurgent demand for riskier assets. Brent crude jumped to nearly $74 a barrel, up 75 per cent from January. Base metals, including copper, aluminium, zinc, lead and nickel rallied 4-6 per cent. White sugar jumped to a 26-year high.
So what next for the dollar? As some currency analysts note, with the surge in oil prices and general boost in commodities, commodity-linked currencies have come back into vogue – amid strongly optimistic forecasts for currencies such as the Australian, NZ and Canadian dollars, all of which have notched up new highs for the year against the dollar this week.
As Bloomberg reports, Stephen Jen, former Morgan Stanley forex strategist and now managing director of macro and currencies at BlueGold Capital Management, wrote in a Monday research note: “Commodity prices, especially oil, should maintain their uptrend…For the dollar, the immediate risk is down, as risk appetite recovers.”
Never one to stay far from any debate, commentator Nouriel Roubini, rapidly shedding the bear-skin he sported through much of the financial crisis, has also come out with optimistic forecasts for commodities, telling a mining conference in Western Australia: “As the global economy moves towards growth as opposed to a recession, you are going to see further increases in commodity prices, especially next year.”
The Aussie d0llar also benefited strongly from earlier speculation that the Reserve Bank of Australia would decide on Tuesday to refrain from cutting interest rates, rising to a 10-month high of $0.8424 ahead of the RBA’s rate decision on Tuesday afternoon.
Overall, improved risk appetite, fuelled by the robust performance of stocks, has also spurred investors to abandon the relative safety of the dollar in search of yield.
In the view of Marc Chandler, global head of currency strategy at Brown Brothers Harriman, “at the risk of exaggeration, there is only one story and it is growth”. Essentially, he says, “enhanced prospects for growth have cast a pall over the dollar”.
In a new report, “Race to Debase?” (hat-tip, Real Clear Markets) Chandler notes:
Consistent with the recent trend among economists to emphasize the psychological dimension of economics, sentiment appears to be one of the key drivers of the dollar’s underperformance.
Numerous investors, speculators, and even some foreign officials are worried that the current mix of aggressive monetary and fiscal policy will result in higher inflation, which will erode the dollar. Many observers believe that the US actually seeks a weaker dollar in order to boost exports and/or deliver what some regard as a stealth default. The debasement of the dollar would reduce the value of US debt to numerous foreign investors, including central banks. China, the single largest foreign holder of Treasuries, has expressed such concerns, sending a powerful signal to other investors.
Chandler also takes on the conspiracy theorists who believe the US is deliberately driving down the dollar, arguing that strong dollar declaratory policy is still very much in place. “No Treasury secretary since Rubin has threatened to purposely debase the dollar,” he notes, while acknowledging that the assumption that the US seeks or has an intention to do so is actually spurring part of the negative sentiment:
This understanding seems faulty. It cannot be demonstrated, intentions and motivations are often difficult to ascertain. It concedes too much power to intentions in any event. Of the myriad of factors capable of influencing currency prices, official intentions do not appear very salient.
The SNB [Swiss National Bank] is trying, with material intervention to drive the Swiss franc down; it is struggling to accomplish this. Are we really to believe that the possible intention of a US official can succeed where billions of dollars have failed for Switzerland? Color me skeptical.
Most importantly, the assumption is mistaken because it misconstrues the dollar’s role. Outside of forswearing the use of the greenback’s value as a policy lever, the US dollar is a residual of the pursuit of other policies. Barring a dramatic destabilizing movement, US policy makers do not place much significance on bilateral nominal exchange rates. The US economy, employment, consumption, investment, inflation, and equity market performance cannot be deduced from the dollar.
Sentiment toward the dollar may turn around when investors and speculators are no longer paid to be short the greenback, and US interest rates rise above those in Europe. Sentiment may turnaround when the sales no longer generate satisfaction. Sentiment is likely to change before US dollar policy.
Related links:
Dollar trades near 7-month low before US economic reports - Bloomberg
Dollar stays near year’s low on boosted risk appetite – Reuters