The strong continued rise in commodities, particularly the recovery in gold, suggests not only worries about inflation, but the dollar as well. And a dollar reversion appears to be underway.
For the last year, if not longer, rallies in the yen have been a sign of investors shedding risk and unwinding carry trades. Yet the VIX, considered an indicator of investor risk perceptions, has dropped by more than half since March, but the yen has started moving up from its recent lows of over 105 to the dollar (it is in the high 103s right now). Similarly, the Aussie dollar reached a 24 year high yesterday.
The reason? Continued concern about the US economy and banking system means investors are increasingly of the view the Fed will stand pat or cut rates further, which is bad for the dollar, particularly if other central banks keep rates steady or increase them to choke off inflation.
From Bloomberg:
The dollar fell against the yen and euro as the International Monetary Fund said there’s a risk the U.S. housing slump will cause further financial-market turmoil.
The currency declined against the Swiss franc and British pound before industry reports this week that economists forecast will show falling U.S. home prices and sales. The Australian dollar rose to its highest in 24 years against the dollar after minutes of the central bank’s last meeting signaled policy makers considered raising rates.
“A worsening housing slump is an albatross around the U.S. economy’s neck,” said Kazuo Mizuno, chief economist in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan’s second-largest financial group. “This will push down the dollar.”….
“We still see serious risks to global financial stability,” IMF Deputy Managing Director John Lipsky said in a speech in Tokyo today that was delivered by Daniel Citrin, the IMF’s Asia-Pacific deputy director.
Note that the dollar weakening had started before the IMF announcement. From the Financial Times:
Meanwhile, the US dollar dropped to a three-week low of $1.5632 against the euro early in yesterday’s session, remaining on the back foot following a sell-off at the end of last week after US consumer confidence came in at its lowest level for 28 years in May. This drove investors to pare back bets that the Federal Reserve’s next move on interest rates would be a rise, prompting some to call an end to the recent rally in the dollar.
Maurice Pomery at IDEAglobal said the recent strength in oil and gold prices suggested that dollar weakness was resuming on a broader scale and traders were now looking at the state of the consumer in the US where growth was very poor and higher prices have taken their toll.
He said: “The dollar is going down and the surprise might be how quickly”.
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The recent rally always seemed like a head fake to me. Can’t see what fundamentals would make the dollar rise. Eurozone weakness was not a convincing argument. A lot of talk about the dollar and where it is going is just flimsy opinion. Early in ’08 you read the dollar would rebound because the Fed rate cuts would stimulate US growth; this seems less likely now. Then it was said that the Fed pausing would rally the dollar. With rates so low?
So place your bets.
“there’s a risk the U.S. housing slump will cause further financial-market turmoil.”
… and there’s a risk that I may die one day too.