Carry Mantle Has Fallen On The Dollar For Now. By Nicholas Hastings
The new carry trade will carry the dollar down even more now.
Instead of rallying, as many had hoped, the U.S. currency now looks exposed to further heavy selling as global interest rate rises are postponed and investors use the dollar to fund their renewed appetite for higher-yielders.
How far the dollar falls now will depend entirely on how far government officials are prepared to let it go.
So far there is little sign of any serious attempt to stop it even though the dollar index continues to tumble to new lows for the year.
In fact, a new Japanese government has stunned markets by insisting that it has no intention of intervening to stop the dollar's fall against the yen except in unusual circumstances - a promise that would have been unheard of under previous administrations.
This has all contributed to the impression that while the dollar will likely test previous Japanese intervention levels around Y87, the U.S. currency will also fall more towards $1.55 against the euro.
Negative prospects for the dollar were cemented this week as it became increasingly clear that although there are signs that the global recovery is well underway - with even U.S. Federal Reserve chairman Ben Bernanke saying that the recession is "very likely over" - inflation pressures remain low enough to ensure that interest rates can remain lower for longer.
Analysts are now forecasting that rates won't have to start rising until the end of this year or early next.
This has all helped to encourage further risk appetite among the international investment community, for which the dollar is now providing the perfect funding currency.
With U.S. three-month LIBOR rates remaining under the level offered by similar Japanese rates, investors have every reason to sell the dollar and use the proceeds to invest in higher-yield asset markets - just as they once did with the yen when Japanese interest rates were the lowest among the major economies.
Increased confidence in the global recovery is being reflected not only in the extended rallies in global equity markets but in renewed strengths in commodity prices, especially in the price of gold, which has now risen over $1,020 a troy ounce - only $12 away from its March 2008 all-time high about $1,032.
Although the dollar's recent decline has itself contributed to the rise in the dollar-denominated commodity prices, some of the commodity price gains are also coming from the anticipation of higher global demand as the world emerges from recession.
And for the dollar, this could mean continued selling pressure until inflation fears return and markets start speculating that U.S. interest rates are on their way back up again.
Early Thursday in Europe, the dollar remained under selling pressure against most major currencies, although it did get some respite against the yen because of an option play around Y90.60.
By 0645 GMT, as Asian stock markets closed with gains of as much as 2.0%, the euro was able to push ahead to $1.4756 from $1.4729 late on Wednesday in New York. The euro was also down at Y134.24 from Y133.72 as investors sought more risky asset markets.
The dollar advanced, however, to Y90.97 from Y90.78.
Instead of rallying, as many had hoped, the U.S. currency now looks exposed to further heavy selling as global interest rate rises are postponed and investors use the dollar to fund their renewed appetite for higher-yielders.
How far the dollar falls now will depend entirely on how far government officials are prepared to let it go.
So far there is little sign of any serious attempt to stop it even though the dollar index continues to tumble to new lows for the year.
In fact, a new Japanese government has stunned markets by insisting that it has no intention of intervening to stop the dollar's fall against the yen except in unusual circumstances - a promise that would have been unheard of under previous administrations.
This has all contributed to the impression that while the dollar will likely test previous Japanese intervention levels around Y87, the U.S. currency will also fall more towards $1.55 against the euro.
Negative prospects for the dollar were cemented this week as it became increasingly clear that although there are signs that the global recovery is well underway - with even U.S. Federal Reserve chairman Ben Bernanke saying that the recession is "very likely over" - inflation pressures remain low enough to ensure that interest rates can remain lower for longer.
Analysts are now forecasting that rates won't have to start rising until the end of this year or early next.
This has all helped to encourage further risk appetite among the international investment community, for which the dollar is now providing the perfect funding currency.
With U.S. three-month LIBOR rates remaining under the level offered by similar Japanese rates, investors have every reason to sell the dollar and use the proceeds to invest in higher-yield asset markets - just as they once did with the yen when Japanese interest rates were the lowest among the major economies.
Increased confidence in the global recovery is being reflected not only in the extended rallies in global equity markets but in renewed strengths in commodity prices, especially in the price of gold, which has now risen over $1,020 a troy ounce - only $12 away from its March 2008 all-time high about $1,032.
Although the dollar's recent decline has itself contributed to the rise in the dollar-denominated commodity prices, some of the commodity price gains are also coming from the anticipation of higher global demand as the world emerges from recession.
And for the dollar, this could mean continued selling pressure until inflation fears return and markets start speculating that U.S. interest rates are on their way back up again.
Early Thursday in Europe, the dollar remained under selling pressure against most major currencies, although it did get some respite against the yen because of an option play around Y90.60.
By 0645 GMT, as Asian stock markets closed with gains of as much as 2.0%, the euro was able to push ahead to $1.4756 from $1.4729 late on Wednesday in New York. The euro was also down at Y134.24 from Y133.72 as investors sought more risky asset markets.
The dollar advanced, however, to Y90.97 from Y90.78.
- 17 September |
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