None of any other major currencies is believed to perform better than the dollar in 2009
Shen Minggao and Zhang Huanyu, Caijing 3 February 2009
Worried about the U.S. economy and in a rush to sell your dollars? Do it after you can think of a more desirable currency to take its place.
The U.S. dollar has been buoyed by reversed capital flow to the U.S. from other parts of the world. Funds repatriate as institutions deleverage; investors seek safe haven still in U.S. treasuries. So the U.S. dollar, ending years of constant weakening, soared 31.6 percent, 19.4 percent and 22.8 percent against the Australian dollar, the euro and the sterling respectively in the five months ending in November 2008.
The relative strength of the U.S. economy compared to the European one contributes to the gain of the dollar. The European economy may be more sluggish to recover, not only because the risk of high leverage in Europe’s financial sector is yet to be fully eliminated, but also because the European economic stimulus plan, lacking coordinated action among the member countries, will have a dubious impact.
Similarly, the U.K. economy has been deemed less resilient than the U.S. economy, as the U.K. stimulus is moderate at best compared to the U.S. one. Also, the U.K.’s benchmark interest rate of 1.5 percent, much higher than those in the U.S. and Japan, leaves investors looking forward to further rate cuts and postponing economic activities.
Other major currencies, such as the Canadian dollar, Australian dollar and New Zealand dollar, as commodity-related currencies, are largely linked to the prices of their exported resources. Since the commodity prices usually fit in super-cycles rather than regular business cycles, these currencies may still be in the middle of an extended sliding.
To determine whether the dollar is reaching a turning point, a good reference is the Japanese yen. The yen has always been positively correlated with the dollar in terms of exchange rate, and it has also appreciated significantly as a result of the global financial turmoil.
As central banks race to cut rates in order to give borrowers a hand, the spread between the Japanese interest rate and that of other countries get squeezed, forcing frustrated spread traders to pull their funds back to Japan. The consequence has been a much stronger yen, straining Japan’s exports.
The yen would depreciate again only after Japan’s housing bubble pops, when the financial sector brings down leverage to an appropriate level. And only then will the U.S. dollar be ready to soften.
That will happen, some day, because anyone not turning a blind eye to the U.S. government’s massive injection of liquidity into the financial system and the market would be concerned about a significant devaluation of the dollar. But that is not going to happen without the global economy stabilizing and the foreign exchange market reviving, where investors find non-dollar assets attractive again.
An indispensible element for the foreign exchange market’s restoration is the stabilizing of the spread between LIBOR, the rate at which banks would like to lend to each other, and the yield rate of the 10-year U.S. Treasury bond.
Although this spread seems to have been tamed recently, it is still far from safe to denounce further credit crunches, since the banks’ balance sheets are yet to be properly improved and they are still reluctant to lend. The inactivity of the banking system could only delay the recovery of the real economy. Therefore, before we see the spread between the benchmark rates and the mortgage rates or other major consumer credit rates truly narrow down, we cannot expect the foreign exchange market to thaw.
The whole picture we may be looking at in 2009, therefore, may be that a strong dollar, sluggish euro and sterling pound as well as the commodity-related currencies, and a volatile yen. So, holding the dollar, for 2009, is probably safer.
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Holding U.S. Dollar Still Safe
None of any other major currencies is believed to perform better than the dollar in 2009
Shen Minggao and Zhang Huanyu, Caijing
3 February 2009
Worried about the U.S. economy and in a rush to sell your dollars? Do it after you can think of a more desirable currency to take its place.
The U.S. dollar has been buoyed by reversed capital flow to the U.S. from other parts of the world. Funds repatriate as institutions deleverage; investors seek safe haven still in U.S. treasuries. So the U.S. dollar, ending years of constant weakening, soared 31.6 percent, 19.4 percent and 22.8 percent against the Australian dollar, the euro and the sterling respectively in the five months ending in November 2008.
The relative strength of the U.S. economy compared to the European one contributes to the gain of the dollar. The European economy may be more sluggish to recover, not only because the risk of high leverage in Europe’s financial sector is yet to be fully eliminated, but also because the European economic stimulus plan, lacking coordinated action among the member countries, will have a dubious impact.
Similarly, the U.K. economy has been deemed less resilient than the U.S. economy, as the U.K. stimulus is moderate at best compared to the U.S. one. Also, the U.K.’s benchmark interest rate of 1.5 percent, much higher than those in the U.S. and Japan, leaves investors looking forward to further rate cuts and postponing economic activities.
Other major currencies, such as the Canadian dollar, Australian dollar and New Zealand dollar, as commodity-related currencies, are largely linked to the prices of their exported resources. Since the commodity prices usually fit in super-cycles rather than regular business cycles, these currencies may still be in the middle of an extended sliding.
To determine whether the dollar is reaching a turning point, a good reference is the Japanese yen. The yen has always been positively correlated with the dollar in terms of exchange rate, and it has also appreciated significantly as a result of the global financial turmoil.
As central banks race to cut rates in order to give borrowers a hand, the spread between the Japanese interest rate and that of other countries get squeezed, forcing frustrated spread traders to pull their funds back to Japan. The consequence has been a much stronger yen, straining Japan’s exports.
The yen would depreciate again only after Japan’s housing bubble pops, when the financial sector brings down leverage to an appropriate level. And only then will the U.S. dollar be ready to soften.
That will happen, some day, because anyone not turning a blind eye to the U.S. government’s massive injection of liquidity into the financial system and the market would be concerned about a significant devaluation of the dollar. But that is not going to happen without the global economy stabilizing and the foreign exchange market reviving, where investors find non-dollar assets attractive again.
An indispensible element for the foreign exchange market’s restoration is the stabilizing of the spread between LIBOR, the rate at which banks would like to lend to each other, and the yield rate of the 10-year U.S. Treasury bond.
Although this spread seems to have been tamed recently, it is still far from safe to denounce further credit crunches, since the banks’ balance sheets are yet to be properly improved and they are still reluctant to lend. The inactivity of the banking system could only delay the recovery of the real economy. Therefore, before we see the spread between the benchmark rates and the mortgage rates or other major consumer credit rates truly narrow down, we cannot expect the foreign exchange market to thaw.
The whole picture we may be looking at in 2009, therefore, may be that a strong dollar, sluggish euro and sterling pound as well as the commodity-related currencies, and a volatile yen. So, holding the dollar, for 2009, is probably safer.
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