Wednesday, December 17, 2008

Panic exodus from the dollar

The dollar began its slide into oblivion today, in response to the Fed lowering of interest rates to nothing.

As I detailed yesterday, the dollar is in a whole lot of trouble, long term. Obviously, I am not the only person to realize this. Unlike industrial policy, unemployment, or reserve amounts, currency market adjustments are instantaneous: as soon as you can think it, you can move on it. For this reason, perhaps my timeline was too optimistic, expecting the dollar to fall later rather than sooner. Because currency markets are future-looking and instantaneous, the dollar collapse may lead the broader economy, rather than follow it. Great, just great, I haven’t purchased all my big ticket items and gold yet, I am not ready for hyper-inflation!

On the other hand, the article below predicts that other central banks will also slash their interest rates soon to help their own economies, thus bringing the dollar back up. Of course, such a move would also feed a worldwide deflation. Very interesting, very interesting. Deflation, hyper-inflation, all these moves and counter moves make it very difficult to predict precise timing. With the Fed’s massive liquidity injections and zero-interest policy, the dollar is facing massive headwinds, being counter-acted by the worldwide rush to US bonds as a safe haven for investment in a global synchronized recession. For now, I will stick with my original prediction of a few more months of economy savaging delation, followed by hyper inflation this coming summer.

Dec. 17 (Bloomberg) -- The dollar declined the most against the euro since the 15-nation currency’s 1999 debut and sank to a 13-year low versus the yen as near-zero interest rates and rising budget deficits led traders to abandon the greenback.

This is a very much a panic exodus from the dollar,” said Brian Dolan, chief currency strategist at, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. “The primary reason is the Fed’s embrace of quantitative easing, in which they start printing dollars and start flooding the market with U.S. assets.” The federal budget deficit widened last month to $164.4 billion, compared with a gap of $98.2 billion in November a year earlier, the Treasury Department reported last week.

“This move is historic,” said Russell LaScala, New York- based head of North American foreign exchange at Deutsche Bank AG, the world’s biggest currency trader. “It’s just going to keep going until the last bit of pain stops. I would not be shocked to see $1.50.”

The greenback extended its drop against a gauge of currencies of six U.S. trading partners, falling 11 percent from a 2 1/2-year high reached Nov. 21. Investors including hedge funds reversed bets that the dollar will appreciate to minimize losses as the end of the year approached, traders said.

The dollar fell as much as 3 percent to $1.4437 per euro, the weakest level since Sept. 29, from $1.4002 yesterday, before trading at $1.4345 at 2:57 p.m. in New York. It was the biggest intraday drop since the euro’s inception. The U.S. currency decreased 1.3 percent to 87.93 yen from 89.05 and reached 87.14, the lowest since July 1995. The euro increased 1.1 percent to 126.08 yen from 124.71.

The pound weakened for the first time beyond 93 pence per euro after the Office for National Statistics said the number of people receiving jobless benefits increased by 75,700 to 1.07 million. Bank of England policy makers voted 9-0 to cut the nation’s benchmark on Dec. 4 to 2 percent, minutes showed. Sterling slid as much as 3.5 percent to 93.27 pence per euro. The pound dropped 0.8 percent to $1.5451.

Dollar Index

The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, fell 2.1 percent to 78.961. It increased 24 percent from a low of 71.314 on July 15 to 88.463 on Nov. 21. The dollar gave back about half of that rally.

The Fed lowered its target rate yesterday to a range of zero to 0.25 percent, from 1 percent, below the Bank of Japan’s 0.3 percent rate. The central bank reiterated plans to buy agency debt and mortgage-backed securities and said it will study buying Treasuries, a policy known as quantitative easing.

Yen’s Gain

The U.S. currency depreciated 21 percent against the yen this year, the most since 1987, as more than $1 trillion of credit-market losses sparked a seizure in money markets and threw the world’s largest economy into a recession.

Central banks intervene when they buy or sell currencies to influence exchange rates. The Group of Seven, which comprises the U.S., Japan, Germany, the U.K., France, Italy and Canada, propped up the dollar in 1995, when it declined to a post-World War II low of 79.75 yen.

The fed funds target was cut to below the BOJ’s rate for the first time since 1993. Japanese policy makers struggled in the 1990s to revive growth as deflation and recessions stranded the nation in what is known as the Lost Decade.

A dollar turnaround could come as early as the first quarter of next year as other central banks lower their interest rates, according to Nick Bennenbroek, head of currency strategy at Wells Fargo & Co.

“The Federal Reserve remains ahead of the curve or more aggressive than most central banks with what it’s doing with its monetary policy,” said Bennenbroek, who forecast the euro will reach $1.45 and possibly $1.50 against the dollar. “Given how severe conditions are, a lot of other central banks are also very rapidly moving their interest rates down toward zero.”

Expectations for currency appreciation were the highest in Japan, Mexico and Germany, a monthly survey of 2,991 Bloomberg users last week showed.

No comments: