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Like a boxer absorbing repeated blows, the American dollar is getting pummelled in global markets.
Yet U.S. policy-makers appear unperturbed. That’s because they know the difference between a losing match and a dangerous rout – and so far, the dollar’s beating has the hallmarks of the former, not the latter.
That could change, of course. What would it take to trigger alarm in Washington? Here’s a sampling of various scenarios.
The greenback’s decline turns into a collapse.
Right now the dollar is weak and getting weaker (against a basket of major currencies, it has slumped to a three-year low, and has touched all-time lows versus several individual currencies). That’s because the U.S. Federal Reserve has reiterated it has no plans to raise interest rates any time soon, giving global investors little incentive to hold assets denominated in U.S. dollars. A feeble currency has its benefits, making U.S. exports cheaper, which stimulates economic growth.
The dollar’s descent has not been “disorderly,” to use the phrase favoured by currency wonks. To cause anxiety in official quarters, the dollar would have to fall faster and in a more chaotic way. Consider what happened to the Japanese yen following the country’s devastating earthquake and tsunami. Although the direction might sound counterintuitive, within days the currency had surged to a record high against the U.S. dollar, including one gigantic spike that unfolded within minutes. Such volatility prompted a co-ordinated intervention in currency markets by the Group of Seven industrialized nations.
The dollar’s weakness starts to infect other markets.
The current swoon in the dollar is “not worrisome but [is] necessary to shrink the trade deficit,” said Martin Feldstein, an economist at Harvard and a former presidential economic adviser. However, the U.S. government might start to worry if the greenback “fell very sharply or led to higher interest rates on bonds.”
To see if the dollar’s weakness is truly rattling investors, the best place to look is the bond market. Right now the market for U.S. government bonds is relatively quiescent, despite worries that the unprecedented efforts to fight the financial crisis will end in inflation. The yield on the benchmark 10-year Treasury bond is 3.3 per cent, a sign that for now, investors aren’t concerned about rising prices or the dollar losing its appeal as a store of value.
If global investors were suddenly reluctant to hold assets in dollars, it would cause a spike in yields on government bonds as their prices fell. “If anything roils the bond market, that would be problematic,” says Alan Ruskin, a macro strategist at Deutsche Bank in New York. “That’s the first port of call for a warning sign.”
A general flight from U.S. assets would be seen in the stock market, too. But for now a falling U.S. dollar can coincide with rising stock prices. It makes American firms that export more competitive, and juices the earnings of multinational corporations, whose overseas profits buy more dollars once converted.
The dollar continues to weaken even when the Fed changes course.
American policy-makers see the dollar’s decline as a largely welcome side-effect of running a highly accommodative monetary policy at a time when many other central banks are moving to increase interest rates.
“If the Fed gets done easing and begins raising rates and the dollar continues to sell off … then there would be more concern,” says Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York. If the weaker dollar turns into a key factor in driving inflation higher, that too would get the central bank’s attention.
Mr. Chandler notes that other parts of the world find strengthening currencies increasingly problematic. “Someone will cry ‘uncle’ before the U.S. does,” he says. For instance, the euro now buys about $1.48 (U.S.), below its all-time high above $1.60, but European policy-makers are likely to complain loudly if the euro nears that record.
Of course, if the euro does hit a new historical high against the dollar in the coming months, despite all of Europe’s own considerable problems, that would “surely be a broader signal that something has gone hopelessly amiss in this part of the world as well,” says Deutsche Bank’s Mr. Ruskin.
Article provided via The Globe and Mail
http://www.theglobeandmail.com/report-on-business/when-to-panic-over-the-shrinking-greenback/article2006001/
" World markets rise on death of Osama bin Laden "..
" like many euphoric bounces, they are often short lived " ...
The Canadian economy contracted in February for the first time in five months as the manufacturing and wholesale trade sectors declined.
Major world stock markets rose, the dollar strengthened and oil prices were lower after news that U.S. forces killed terror mastermind Osama bin Laden following a near-decade-long manhunt.
President Barack Obama announced during holiday-thinned Asian trading hours that the man who inspired the deadly Sept. 11, 2001, terror attacks in the United States was killed in Pakistan in a U.S.-led operation.
Japan's Nikkei 225 gained 1.6 per cent to 10,004.20 — the highest closing since an earthquake and tsunami on March 11 decimated the country's northeastern coast.
South Korea's Kospi index, meanwhile, advanced 1.7 per cent to a new record high of 2,228.96, bringing the Seoul benchmark's gain so far this year to 8.7 per cent.
European markets opened higher. France's CAC-40 rose 0.3 per cent to 4,120.03 and Germany's DAX gained 0.7 per cent to 7,563.52. Britain's FTSE 100 was closed for a holiday.
Wall Street, meanwhile, was set to open higher. Dow Jones industrial futures rose 0.6 per cent to 12,837 and S&P futures gained 0.6 per cent 1,367.80.
Ben Potter, market strategist at IG Markets in Melbourne, Australia, said that bin Laden's death was an immediate boost for equity markets.
“However, like many euphoric bounces, they are often short lived, especially given the possibility for reprisal attacks from extremists,” he wrote in a report.
The greenback rose to 81.51 yen from 81.10 yen. The euro, meanwhile, was weaker at $1.4819 from $1.4839 late Friday in New York.
The dollar was bought on the belief that “terror risk will get smaller” for the United States, said Yuji Kameoka, chief currency strategist at Daiwa Securities Capital Markets in Tokyo. He said that yen weakness and a decline in the price of crude oil were boosting Japanese stock prices.
Oil prices eased off 2 1/2-year highs to below $113 a barrel after Obama announced bin Laden's had been killed.
Benchmark crude for June delivery was down $1.40 at $112.53 a barrel in electronic trading on the New York Mercantile Exchange. The contract settled at $113.93 per barrel on the Nymex on Friday and reached $114.18 during in the session, the highest since September 2008.
Declining oil prices helped boost shares of airlines, which are sensitive to fuel prices. Korean Air Lines Co. Ltd., the country's largest air carrier, soared 6.6 per cent. Rival Asiana Airlines Inc. soared 12 per cent. Japan's All Nippon Airways Co. Ltd. jumped 2.5 per cent.
Stock trading in Asia was thin amid a slew of holidays this week in the region. Hong Kong's Hang Seng index and mainland China's Shanghai Composite Index were closed Monday as were stock markets in Taiwan, Malaysia and Singapore. The Nikkei, Asia's largest market, will be closed Tuesday through Thursday for Japan's annual Golden Week holiday.
Australia's S&P/ASX 200, meanwhile, recovered from early losses to rise less than 0.1 per cent to 4,825.30. Markets in the Philippines and Indonesia also rose, but New Zealand and India were lower.
Markets in Japan and South Korea started in positive territory after the Dow Jones industrial average rose Friday on positive earnings news as construction equipment manufacturer Caterpillar reported strong first-quarter profit.
The Dow rose 47.23 points Friday, or 0.4 per cent, to close at 12,810.54, rounding out April 4 per cent higher, its best month since December.
Caterpillar, the world's largest maker of mining and construction equipment, rose 2.5 per cent after its earnings increased more than fivefold. The company also raised its sales and profit forecast for the year.
Japan's Komatsu Ltd., the world's No. 2 equipment maker, rose 1.7 per cent in Tokyo.
Broader indices in the U.S. also gained.
The Standard & Poor's 500 index rose 3.13 points, or 0.2 per cent, to close at 1,363.61. The index gained 2.8 per cent in April. The Nasdaq composite added 1.01 point to 2,873.54. It rose 3.3 per cent for the month.
Article provided via The Globe and Mail
http://www.theglobeandmail.com/globe-investor/world-markets-rise-on-death-of-osama-bin-laden/article2006524/
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