Welcome to Call to Decision
The
Dollar Collapses
09.08.2009,
4:05 PM ET
Forbes Magazine
The U.S. dollar reached its lowest point against the euro this
year due to a myriad of forces including rising global stocks and
commodities prices, low interest rates, and investors diversifying out
of Treasury debt and into other assets including U.S. stocks with the
Dow Jones industrial average approaching 9500 in late afternoon trading.
Stocks in Asia and Europe saw big gains,
and gold topped $1,000 an ounce. (See "Stocks,
Commodities Rally After Long Weekend.") Oil also gained 4.9%,
or $3.31, to $71.33, on the New York Mercantile Exchange, due in part to
Goldman Sachs affirming its year-long outlook. By midday trading one
euro traded for $1.45, meanwhile the Dollar Index, which tracks the
greenback against a basket of currencies, fell to its lowest level since
September of 2008.
"It isn't as if the fundamentals are
better in Europe," said Jessica Hoversen, a foreign exchange and
fixed income futures analyst at MF Global. "There are other factors
outside of economic growth taking hold in the market."
Japan's special drawing rights holdings
hit a record $18.5 billion, from $3 billion in July. SDRs are the
currency of the International Monetary Fund and other international
institutions. It's a basket of currencies composed of the dollar, euro,
sterling and yen in a fixed weighting determined by the IMF and World
Bank every five years.
One of the reasons cited for the rise is
an increased in commitment in overseas aid, but Hoversen noted that to a
certain degree it speaks to the general demand for the dollar, and that
scares the market. "It doesn't necessarily mean diversification
away from the dollar, but there is a heightened sensitivity about the
topic," Hoversen said.
Currency investors have been obsessed
with the prospect of central banks diversifying out of the dollar. (See "Spotlight
On The Dollar.") The fixation has been fueled by meetings under
the G20/G8 framework, as well as candid comments from some of the
largest reserve managers, namely Russia and China. The prospects of a
massive diversification are low though, at least in the short-term,
because most of the alternatives, including using SDRs as a global
reverse currency are unrealistic.
The three-month London Interbank Offer
Rate, commonly known as the Libor, which reached a record low of 30
basis points and that also contributed to the dollar's slide. "It
makes the dollar the cheapest interest rate differential in the G10 on a
Libor basis," Hoversen said.
The dollar's fall follows a United
Nations report released Monday calling for a reduced role of the dollar
as the world's primary reserve currency.
"This is not the first time the U.N.
has called for this, but it's the most recent," Hoversen said. The
report, which was produced by the U.N. conference on Trade and
Development, stated that a viable solution to the exchange-rate problem
would be a system of managed flexible exchange rates targeting a rate
that is consistent with a sustainable current-account
position.
"What the U.N. may be trying to do
is eliminate global dependence on the dollar," Hoversen said.
"However, more details would be needed on the mechanism for
adjustment to judge how it would affect the global currency
markets."
To be sure, the U.S. isn't solely
responsible for the global imbalance. While the U.S. current account
deficit is being funded by developing countries, the demand from
developed countries is improving their living standards. Meanwhile,
developing countries have kept their currencies low in order to
stimulate economic growth via their export market, and ultimately change
will be required on both sides. (See "Decouple
Or Die.")
Hoversen also pointed out that curves of
the overnight index swaps have Norway and Australia pricing interest
rate hikes first. "They gain on the idea the global economy is
going to recover," Hoversen said. "Their central banks have
also been more hawkish than other banks." Commodity-based economies
will be on the ground floor of supplying the increased demand. Moreover,
Australia and New Zealand will be greater beneficiaries of the Chinese
stimulus than other commodity currencies. G20 members also promised to
keep fiscal and monetary stimulus running on full cylinders, suggesting
an increased amount of risk, Hoversen said.