Dollar Will Gain As Global Worries Rise. By Nicholas Hastings
Global risk sentiment will probably deteriorate further, playing more into the dollar's hands than ever before.
Sentiment has becoming increasingly gloomy in recent weeks as the risk of a double dip recession in the U.S. has grown and the outlook for the global recovery has been downgraded.
The problem for investors is that there is no reassurance that the authorities are taking appropriate action.
Just look at the U.S. A few weeks ago, the Federal Reserve did agree to extend its bond purchases and so preserve levels of market liquidity for now. However, there is no agreement within the central bank to do any more.
As it is, a report in The Wall Street Journal this week shows that seven of the 17 members of the Fed were against maintaining the size of the balance sheet. This split means that extending quantitative easing, in other words expanding the Fed's balance sheet even more, will prove even more difficult than expected.
It will be interesting to see how much this is acknowledged by Fed Chairman Ben Bernanke in his Jackson Hole speech at the end of the week. His speech will coincide with the release of data that are expected to revise second-quarter gross domestic product growth all the way down to 1.3% from 2.4%.
The problem is that it isn't only the U.S. recovery that is faltering so badly.
In Europe, second-quarter German growth may have been a more bullish 2.2%. However, its economy is still highly reliant on exports, which will only get worse as the global economy slows again, and its smaller weaker neighbors are only likely to act as an economic drag.
The sovereign debt problems of some members show little sign of going away and Moody's provided a further reminder of the risks by warning that it could knock Spain's credit rating lower next month. Standard & Poor's has already lowered Ireland's rating to AA- from AA late Tuesday.
The outlook for the U.K. is also deteriorating rapidly as massive public spending cuts kick in this autumn. Even the Bank of England's newest member, Martin Weale, has warned that the risks of a double dip recession in the U.K. are "significant."
Over in Japan, matters are even worse. The yen's recent role as a safe haven that has pushed the dollar to a 15-year low under Y85, has taken its toll. Growth is weak, deflation predominates and the Nikkei has tumbled below 9000 for the first time in 15 months.
See how the dollar has fallen against the yen in recent years:
Sentiment has becoming increasingly gloomy in recent weeks as the risk of a double dip recession in the U.S. has grown and the outlook for the global recovery has been downgraded.
The problem for investors is that there is no reassurance that the authorities are taking appropriate action.
Just look at the U.S. A few weeks ago, the Federal Reserve did agree to extend its bond purchases and so preserve levels of market liquidity for now. However, there is no agreement within the central bank to do any more.
As it is, a report in The Wall Street Journal this week shows that seven of the 17 members of the Fed were against maintaining the size of the balance sheet. This split means that extending quantitative easing, in other words expanding the Fed's balance sheet even more, will prove even more difficult than expected.
It will be interesting to see how much this is acknowledged by Fed Chairman Ben Bernanke in his Jackson Hole speech at the end of the week. His speech will coincide with the release of data that are expected to revise second-quarter gross domestic product growth all the way down to 1.3% from 2.4%.
The problem is that it isn't only the U.S. recovery that is faltering so badly.
In Europe, second-quarter German growth may have been a more bullish 2.2%. However, its economy is still highly reliant on exports, which will only get worse as the global economy slows again, and its smaller weaker neighbors are only likely to act as an economic drag.
The sovereign debt problems of some members show little sign of going away and Moody's provided a further reminder of the risks by warning that it could knock Spain's credit rating lower next month. Standard & Poor's has already lowered Ireland's rating to AA- from AA late Tuesday.
The outlook for the U.K. is also deteriorating rapidly as massive public spending cuts kick in this autumn. Even the Bank of England's newest member, Martin Weale, has warned that the risks of a double dip recession in the U.K. are "significant."
Over in Japan, matters are even worse. The yen's recent role as a safe haven that has pushed the dollar to a 15-year low under Y85, has taken its toll. Growth is weak, deflation predominates and the Nikkei has tumbled below 9000 for the first time in 15 months.
See how the dollar has fallen against the yen in recent years:
But, there is little sign that the Japanese authorities are ready to either intervene in the markets or introduce some new policy easing to stop the yen's rise just yet, despite reports in Tokyo that the Bank of Japan will call an emergency meeting.
For investors, this lack of any imminent policy action by any of the major central banks or governments will only increase uncertainty and reduce their appetite for risk. With the CRB Index on the slide and commodity currencies under pressure, safe havens still look like the best bet.
Until now, the dollar has played this role along with the yen as well as the Swiss franc. However, as the U.S. currency slides to a 15-year low under Y85 and as the Swiss franc starts to become more of a problem for the Swiss authorities as the euro falls towards CHF1.31, chances are that the threat of action by central banks in both of these countries will rise.
As a result, both the yen and the Swiss franc could slide down the safe-haven league table, leaving the dollar to benefit more than before as the global outlook deteriorates once again.
Early Wednesday in Europe, global sentiment continued to slump, with data showing a further slowdown in Japanese export growth adding to the gloom. However, speculation over a Bank of Japan meeting helped to take the yen off its highs.
By 0645 GMT, the dollar managed to rise to Y84.30 from Y84.15 late on Tuesday in New York, according to EBS. The euro slipped to $1.2662 from $1.2674 but rose to Y106.73 from Y106.64.
Bloomberg TNI FRX POV
Reuters USD/DJ
Thomson P/1066 or P/1074
(Nick Hastings has covered the foreign exchange markets and industry for over 20 years. Apart from his written commentary and analysis, he also appears on Fox Business News and CNBC television in Europe, Asia and the U.S. He can be contacted on +44-20-7842-9493 or by email: nick.hastings@dowjones.com)
- 25 August |
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