Thursday, May 15, 2008

What is behind the revival of the greenback?

Since its April 22 low against the euro, the dollar has risen about 5% vs. the euro, 2.6% vs. the British pound and about 4% compared with the Swiss franc. The U.S. dollar index, which reflects the dollar's moves against a basket of six currencies, has gained 3.8% since its March 17 low.

On April 11 the Group of Seven financial ministers noted in their statement that they are concerned about "sharp fluctuations in major currencies". The impact on the EUR/USD currency cross was muted at the time. Currency analysts are now looking to the G7 statement for some clues. Analysts are guessing that the U.S. and Europe have been successful in convincing central banks from the BRIC countries and sovereign-wealth funds to temporarily stop converting their accumulated U.S. dollar-holdings to the euro. And that pressure has contributed to the dollar's stabilization.

A senior U.S. Treasury official, quoted in The Wall Street Journal Saturday, said the Bush administration was leading an international effort to put a floor under the falling dollar. Two days earlier, the Financial Times quoted unnamed senior officials as saying the U.S. and Europe have a united desire to see the dollar strengthen against the euro.

The falling dollar has contributed to cushion the blow to the U.S. economy from housing and the credit crisis by propping up exports. On the other hand it is also blamed for the ever rising oil and commodity prices and the resulting inflationary pressures put the Federal reserve in a tight spot. It might well have reached a breaking point where the authorities have no choice. In the meantime we can observe a perfectly macro-economic explanation that has led to the resurgence of the greenback.

4/11: The change in the G-7 statement was the most significant since the Boca Raton, Florida, meeting in February 2004, when officials cautioned against ``excess volatility.'' The latest statement didn't explicitly mention the dollar or suggest plans for intervention, in which central banks arrange purchases or sales of foreign exchange.

4/14-18 IB report 1Q results that are better than expected

4/22: Implied volatility on options for the dollar fell to 11.28 percent after the G-7 meeting on April 11. It was 14.5 percent on March 17, the same level at which the G-7 stepped into the market in 1995 to influence prices.

4/23: European stocks fell for a third day, led by banks, on deepening concern about credit-market losses.

4/24: Fed Weighs Pause After Next Rate Cut accdg to Greg Ip WSJ
4/24: The IFO Institute’s measurement of German business confidence fell to 102.4 from 104.8; current assessment fell to 108.4 from 11.5 and expectations to 96.8 from 98.4.

4/28: Economic growth in the euro region will slow to 1.5 percent next year, the commission said today in its spring economic forecast, 0.6 percentage point less than it projected in November and below the 1.7 percent expansion expected for 2008. Inflation will jump to 3.2 percent this year, 0.6 percent more than the commission's February forecast, before easing to 2.2 percent in 2009.

4/28: Moody's assigned 32 negative outlooks to European companies in the first quarter, almost triple the 11 that were positive, the New York-based ratings firm said in a report today. The gap is the widest since 2001 and indicates deteriorating credit quality in 12 to 18 months, Moody's said.

4/29: European Retail Sales Slumped in April to a seasonally adjusted 41.8 from 48.2 in March.

4/29: The S&P/Case-Shiller home-price index dropped 12.7 percent from a year earlier, more than forecast and the most since the figures were first published in 2001.

4/30: FOMC indicates a pause

5/5: European Central Bank President Jean- Claude Trichet, who chaired a meeting of central bankers from the Group of 10 industrialized nations today, said the world economy continues to grow and inflation risks are significant - warns of a rate hike in the future

5/6: Swiss bank UBS, hard hit by the U.S. subprime crisis, reported a first-quarter loss of $10.97 billion and said Tuesday it will slash almost 7 percent of its work force.

5/8: ECB leaves rates unchanged - Trichet warns of protracted period of high inflation

source: Dollar rally, leaks put fresh focus on G7 meetings
By Laura Mandaro, MarketWatch

No comments: