Category: Economic Conditions

After a Weak Week, the Dollar Regains Some Ground

The US dollar is firmer against most major and emerging market currencies to pare this week’s decline.  There are three notable exceptions, and they are all in Asia.  For all practical purposes, the dollar is flat against the Japanese yen near JPY111.30. 

The South Korean won is up almost 1% to extend this week’s pace setting the gain to 2.65%.  The dollar has fallen 7.2% against the won since it peaked at the end of last month.  The Taiwanese dollar is 0.6% higher, which essentially doubles this week’s gains.

Market Participants Gauge the Fed’s Cautiousness

The Federal Reserve’s cautiousness has sent the dollar reeling.  The Fed’s backtracking to two hikes this year from four is still met with skepticism by the market.  It previously had a June hike nearly discounted but it has not pushed that out until September. 

Fewer Rate Hikes, Lower Dollar, Higher Stocks

The Federal Reserve halved the number of rate hikes it anticipates this year from four to two.  The market has been moving toward this as well after having thought there would be no hikes this year.  The dollar sold off.  The dollar-bloc currencies and emerging market currencies are have rallied sharply. Risk assets in general like the idea of a less hawkish Federal Reserve. 

Equities and Oil Move Lower while the Dollar and Yen Move Up

The US dollar is steady to firmer against most of the major and emerging market currencies.  Equity markets are heavier, and oil continues to surrender some of its recent gains.  Profit taking is weighing on Eurozone bonds and JGBs while US Treasuries and UK gilts are firmer. 

Ahead of the Fed, the Dollar is Still Solid

The US dollar is firmer but largely confined to the ranges seen before the weekend against most of the major currencies.  The yen is also firmer as dollar sellers reemerged near JPY114.00.  The dollar is gaining against most emerging market currencies, though Asian currencies, notably the Korean Won, are firmer.

One Cannot Rely on Monetary Policy Alone

Fixed exchange rates limit the degrees of freedom for policymakers.  The breakdown of Bretton Woods in 1971 removed this constraint on official action, and the results were larger budget deficits and higher inflation.  The zero bound on interest rates also posed a constraint on behavior. Until this year, despite the long struggle against deflation, the Bank of Japan never instituted a negative policy rate.

The ECB Likely had Hoped for a Better Economic Backdrop

Fasten your seat belts.  The ride is going to get bumpy.   Economists may differ on what the ECB will do.   Investors may differ on the market response.  This uncertainty ensures a strong market reaction.

The euro is off about 0.25% after recovering in the North American session yesterday.  The euro has spent this week thus far mostly within last Friday’s trading range.  It has finished the North American session in the last four sessions between $1.0999 and $1.1014 according to Bloomberg. 

There is News, but Market Participants Await the ECB Meeting

The euro has peeled off a cent from yesterday’s high near $1.1060 as some short-term players move to the sidelines ahead of the ECB meeting.  Recall that after peaking near $1.1375 on February 11 when the New Year’s market angst peaked, the euro fell back to the lower end of its old range near $1.0825 in the middle of last week.  It then recovered by about 2.5 cents into yesterday’s high, which saw it test the 20-day moving average for the first time since February 22.   

Commodities, China, Brazil, Greece and other Headlines

A few weeks ago, investors were bemoaning a new bear market for equities, and there was much ink spilled drawing parallels between now in 2008-2009.  Falling commodities, weakening growth, and prospects of Fed tightening saw the MSCI Emerging Market equity index fall 21.5% from early-November through the third week in January.  Since then it has rallied more than 16%, and both yesterday and earlier today traded above where it finished 2015. 

A Tuesday Turn Around of Recent Trends

Recent trends, which include firmer equities and oil, weaker euro and bonds, and stronger dollar-bloc currencies, are reversing today, a turn-around Tuesday of sorts. MSCI’s Emerging Market equity index is snapping a seven-day advancing streak, giving back yesterday’s gains and a little more.  However, Chinese shares managed to post small gains.