In the absence of a world war, and with the football World Cup a distant memory, it seems that hopes and fears are now projected on to international currency markets. The yen’s advance is unstoppable. Watch out, the euro is about to break up. The American dollar is in terminal retreat. That investors lurch wildly among alternative views on a monthly basis is perhaps predictable, given broader uncertainties. Still, everyone should calm down.
What’s so surprising about recent movements in the dollar? Sure, it has fallen 20 cents to $1.39 versus the euro since June. But it has been at this level a dozen times in the past two years and is 13 per cent stronger than it was in mid-2008. Indeed, the overall trend since then against the euro is up. Yes, the dollar is at 15-year lows against the yen. Japan’s currency is higher across the board, however, as the country’s trade surplus confers it a peculiar “safe haven” status.
On a trade-weighted basis, the dollar is also in unremarkable territory, as it is versus sterling. Even battling the mighty Swiss franc, the dollar is only just below parity – where it was in early 2008. Of course, reasons can be found for the recent weakness. It is ever clearer that the Federal Reserve is nowhere near increasing policy rates from near-zero. The talk of further quantitative easing, a practice currently considered bad for the dollar, is getting louder.