Tuesday, May 09, 2006


Currency Matters Take Center Stage

Currency issues are making the news. "The dollar edged modestly lower against major rivals early Tuesday, as markets continued to consolidate ahead of the Federal Reserve statement on interest rates and a Treasury report on the currency market, both due on Wednesday. In early New York trading, the dollar weakened to 111.32 yen, down 0.3%. The euro changed hands at $1.2713, up 0.1%. The British pound last traded up 0.2% at $1.8616. The dollar weakened 0.3% to 1.2246 Swiss francs."

"Overnight, the yen strengthened after news that the Bank of Japan will upgrade its economic assessment for the first time in 15 years. 'There is increased speculation that the Bank of Japan may raise rates as early as next month, rather than in July-August as most had thought likely,' said Marc Chandler, currency strategist at Brown Brothers Harriman."

"Bank of Japan Governor Toshihiko Fukui said over the weekend that the central bank is open about what its next policy step should be. He also said the bank is in the process of mopping up the excess liquidity and would take several more weeks to complete this process."

From the Wall Street Journal. "The notion that China or some other American rival could someday use its vast holdings of U.S. debt as a geopolitical weapon, despite the great harm that would also cause to the attacker's own economy, is gaining (forgive the term) currency in some quarters."

"The reason: the dramatic growth of global foreign reserves, and thus of U.S. debt, in the hands of developing countries, frequently, undemocratic rivals, already resentful of America's excessive influence. New International Monetary Fund data show that official currency reserves of the developing world nearly quadrupled over the past decade to $2.9 trillion last year, while those of industrialized countries rose 150%."

"Last year alone, emerging-markets' reserve holdings grew 18% from the previous year, against a 1.5% decline among developed countries. That has put nearly 70% of global currency reserves in developing-countries' hands, 'a staggering accumulation' says former U.S. Treasury Secretary Lawrence Summers."

"'The irony is that the three countries in the world adding to reserves the fastest, and thus buying the most U.S. debt now, are China, Saudi Arabia and Russia, none of them democracies,' says Brad Setser, director of research at Roubini Global Economics. Not far behind are Venezuela and Iran, countries eager to use their oil riches to undermine the U.S. 'We are increasingly counting on a group of creditors who are not our closest friends but have a bigger and bigger stake in America.'"

The Financial Times. "The struggling US dollar fell against Asian currencies yesterday as regional markets reopened after the Golden Week holiday and a perceived war of words between the US and Japan intensified."

"'These reported comments are fuelling speculation that the US authorities are now actively seeking a weaker dollar,' said Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi UFJ. 'This kind of speculation is dangerous and could result in a similar scale of dollar selling that took place in the final quarter of 2004.'"

And from Mexico. "The governor of Mexico’s central bank has dismissed any apparent similarity between the recent rise in global interest rates and the 1994 rate rise that helped trigger the financial crash known as the Tequila crisis. 'The situation today is very, very different,' Guillermo Ortiz told the Financial Times."

"Several observers have drawn parallels between the two interest rate moves and noted that the recent shift has had a negative impact on Mexico’s leading financial indicators. And, as in 1994, the rise in rates is taking place against a backdrop of presidential elections marked by increasing uncertainty."

"Mr Ortiz admitted that the continuing low spreads of emerging market and corporate debt and abundant global liquidity were possible signs that not enough attention was being paid to risk assessment."

"He also predicted tougher times ahead. 'It is not unthinkable, of course, that there will be some corrections going forward and I doubt very much that, in the next couple of years, we are going to be enjoying the same type of financial atmosphere that we have enjoyed over the last couple of years.'"

A note about the Mexican economy and currency. I don't know what is going on in other states, but the mood in Arizona has changed dramatically. As you may know, Arizona is immigration central. But the last few weeks have seen immigration raid rumors shut down kitchens, hotels, etc. Aliens have reported to be 'hiding in their closet.' And when some don't come to work, it sparks more rumors.

It seems to me that the huge flow of cash from the US to Mexico must be slowing down. The FT article mentioned the Peso being down 5% in recent weeks. If this trend continues, that shaky economy south of the border could fall apart.
wow, lots of solid article ben.
(If this trend continues, that shaky economy south of the border could fall apart.)

and then more people looking for work come into the US.
"I doubt very much that, in the next couple of years, we are going to be enjoying the same type of financial atmosphere that we have enjoyed over the last couple of years."

Just needs a spark.
What is the best way to short the USD?? I'm thinking of opening a Candian 1yr GIC at 3.8% and counting on the loonie to appreciate vs dollar. Any advice?
Short the USD? That's easy, just buy gold. As the USD goes down, gold goes up.
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