The Dollar resumed its decline today, as investors continue to grapple with last week’s Fed announcement. Despite dropping the word “patient” from their current position, the Federal Reserve seems to have signaled a more dovish near-to-mid-term outlook on Fed policy. It seems that while we still might see them raise rates in the next couple months – (June still does not seem out of the question) – that they will be far less aggressive in their sequential decisions.
Still – the currency moves we have been witnessing over the past couple months seem a little volatile for comfort. While the post-recession monetary policy of central banks across the world has undoubtedly left investors scrounging for yields, I wonder to what extent it has destabilized the global currency framework. 1% moves should not be a daily occurrence in the currency markets. We also have a bunch of Asian nations increasingly letting exports dictate monetary policy – that brings a competitive flair to the international monetary framework which, to me, does not seem particularly sustainable.
http://www.bloomberg.com/news/articles/2015-03-23/dollar-holds-drop-after-fischer-talks-rates-oil-stronger
4 Comments
I think it is also surprising that the dollar is falling despite oil’s recent gains. The article doesn’t seem to suggest what the cause of this shift would be due to, just that “market sentiment has turned against the dollar”.
I agree with your concern about volatility. It appears odd that market has not settled any more, and this volatility comes in context of an incredible gain by the dollar relative to the euro over the past year. Most news I have read recently is not very optimistic about an interest rate raise in June, and it also seems people are less confident about September as well.
Not too long ago, I read an article that pointed out other countries took out loans under U.S. currency in order to help profits; however, with the dollar’s recent surge, these same companies were forced to pay back greater amounts than they expected (in other words, the dollar became more valuable relative to the company’s respective currency). With the currency’s current volatility, I would think that the number of companies taking this risk will greatly decrease.
Exchange rates follow a random walk in the short run. If there is some such thing as reversion to an equilibrium rate, that occurs so gradually that we don’t necessarily see reversals of run-ups in value such as the dollar has experienced over the past year. So we should ignore history, and only look at factors that change expectations. Here we do see a continued positioning of the Fed for a rate increase amidst modest growth, and generally weak to bad news out of Europe (depending on Grexit and the weight of pro-austerity forces). Neither of these are “news”. So while we may see volatility, I’m not sure there’s anything suggesting big swings.
Note that less cross-currency borrowing may strengthen the dollar, as firms use the proceeds of a bond issue to buy euros and the like. Fewer foreign bond issues means weaker demand for the euro. However, the volume of such transactions may not be big enough to be noticeable, given the size of forex markets ($5.3 trillion a day in the triennial April 2013 BIS survey, up from $4.0 trillion in their previous survey in April 2010).
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