Why The Dollar Should Rise Some More. By Nicholas Hastings
Confidence in the dollar should be growing.
Over the last week, the risks of U.S. deflation have receded.
On the other hand, the outlook for the Japanese economy has deteriorated and hopes for an early end to the euro zone's debt crisis appear to have been too high.
In other words, the attraction of the U.S. currency should continue to rise.
See how the euro has started to slide against the dollar this month:
Click Image to Enlarge
Let's look at the U.S. itself.
The economic recovery there remains fragile, as reflected in the Fed's decision to sustain market liquidity levels for now and remain on guard to extend quantitative easing if needed.
However, gentle improvements in consumer confidence, a rebound in retail sales and even the latest consumer price figures suggest that the recovery may not be stalling quite as badly as many feared.
In fact, inflation numbers last Friday suggested there has been little increase in deflation pressure over the last month and the need for more quantitative easing is that much less likely.
This slightly more robust view of the U.S. contrasts with developments in both Japan and the euro zone.
News on Monday that Japan had achieved annualized growth of only 0.4% in the second quarter came as a shock, given forecasts for growth of 2.3%.
This will only increase political pressure on the Bank of Japan to pour even more liquidity into financial markets, not only to help the economy by easing policy but by helping to cut off the yen's recent rise.
Japan has been suffering of late from the yen's safe haven role, that has pushed the currency higher and poses a threat to the country's export-led upturn.
Developments in the euro zone may have been different but are no less negative for the euro.
The cost of debt funding in peripheral euro-zone debtor countries has started to rise once again, making it more expensive for these countries to refinance their borrowing and increasing the risk of default.
This has combined with data showing that growth in Germany is soaring not only ahead of expectations but well ahead of most of its euro-zone neighbors.
For the euro, however, this of little consequence. Global investors are well aware that the risks for the single currency are all associated with the problems of the peripheral countries.
They will be more focused on the results of the latest bond auctions in Ireland and Portugal, later Tuesday and Wednesday, respectively, for any evidence that funding costs are still rising.
However, there is another reason why investors will steer clear of the euro. The diverging growth patterns between core euro-zone members, such as Germany, and the rest of the region, suggest the European Central Bank will face an even greater difficulty setting monetary policy at an appropriate level for all members.
So while interest rates are likely to remain low in most countries for the time being, those in the U.S. could well be increased first in a move that would leave Japan and the euro zone lagging far behind.
Early Tuesday, the euro was finding a little support on hopes that the Irish bond auction, which should raise about EUR1.5 billion, proves successful. The market will not only be looking at overall demand for bonds but also the price Ireland has to pay.
More good news could come from Germany too, in the form of the latest ZEW business sentiment survey, especially if the current conditions index comes in up at 21 from 14.6 as forecast.
By 0645 GMT, the euro had risen to $1.2834 from $1.2818 late on Monday in New York, according to EBS. The single currency was also up at Y109.49 from Y109.35.
The dollar ticked up a little to Y85.35 from Y85.30 as speculation over Bank of Japan intervention to halt the yen's rise increased after former finance ministry official Hiroshi Watanabe said Tokyo may intervene if the yen rises too rapidly, but that there is no need to act on the yen for now.
Investors are also looking ahead to a meeting between Prime Minister Naoto Kan and BOJ Governor Masaaki Shirakawa next Monday to see if they decide to introduce any further monetary easing.
Over the last week, the risks of U.S. deflation have receded.
On the other hand, the outlook for the Japanese economy has deteriorated and hopes for an early end to the euro zone's debt crisis appear to have been too high.
In other words, the attraction of the U.S. currency should continue to rise.
See how the euro has started to slide against the dollar this month:
Click Image to Enlarge
Let's look at the U.S. itself.
The economic recovery there remains fragile, as reflected in the Fed's decision to sustain market liquidity levels for now and remain on guard to extend quantitative easing if needed.
However, gentle improvements in consumer confidence, a rebound in retail sales and even the latest consumer price figures suggest that the recovery may not be stalling quite as badly as many feared.
In fact, inflation numbers last Friday suggested there has been little increase in deflation pressure over the last month and the need for more quantitative easing is that much less likely.
This slightly more robust view of the U.S. contrasts with developments in both Japan and the euro zone.
News on Monday that Japan had achieved annualized growth of only 0.4% in the second quarter came as a shock, given forecasts for growth of 2.3%.
This will only increase political pressure on the Bank of Japan to pour even more liquidity into financial markets, not only to help the economy by easing policy but by helping to cut off the yen's recent rise.
Japan has been suffering of late from the yen's safe haven role, that has pushed the currency higher and poses a threat to the country's export-led upturn.
Developments in the euro zone may have been different but are no less negative for the euro.
The cost of debt funding in peripheral euro-zone debtor countries has started to rise once again, making it more expensive for these countries to refinance their borrowing and increasing the risk of default.
This has combined with data showing that growth in Germany is soaring not only ahead of expectations but well ahead of most of its euro-zone neighbors.
For the euro, however, this of little consequence. Global investors are well aware that the risks for the single currency are all associated with the problems of the peripheral countries.
They will be more focused on the results of the latest bond auctions in Ireland and Portugal, later Tuesday and Wednesday, respectively, for any evidence that funding costs are still rising.
However, there is another reason why investors will steer clear of the euro. The diverging growth patterns between core euro-zone members, such as Germany, and the rest of the region, suggest the European Central Bank will face an even greater difficulty setting monetary policy at an appropriate level for all members.
So while interest rates are likely to remain low in most countries for the time being, those in the U.S. could well be increased first in a move that would leave Japan and the euro zone lagging far behind.
Early Tuesday, the euro was finding a little support on hopes that the Irish bond auction, which should raise about EUR1.5 billion, proves successful. The market will not only be looking at overall demand for bonds but also the price Ireland has to pay.
More good news could come from Germany too, in the form of the latest ZEW business sentiment survey, especially if the current conditions index comes in up at 21 from 14.6 as forecast.
By 0645 GMT, the euro had risen to $1.2834 from $1.2818 late on Monday in New York, according to EBS. The single currency was also up at Y109.49 from Y109.35.
The dollar ticked up a little to Y85.35 from Y85.30 as speculation over Bank of Japan intervention to halt the yen's rise increased after former finance ministry official Hiroshi Watanabe said Tokyo may intervene if the yen rises too rapidly, but that there is no need to act on the yen for now.
Investors are also looking ahead to a meeting between Prime Minister Naoto Kan and BOJ Governor Masaaki Shirakawa next Monday to see if they decide to introduce any further monetary easing.
- 17 August |
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