US Dollar rising dramatically

The U.S. Dollar is rising once again. As the realization kicks in that the U.S. will not be alone in its economic struggles, currency traders are making major bets that interest rates will fall outside of the U.S. across the board. The British Pound, the Euro and the Canadian Dollar have all been losers. The Japanese Yen is holding up rather well.

The U.S. has led the charge in cutting interest rates, but as the global economy slows other countries are expected to cut interest rates a lot more. Interest rates are much higher in Australia, New Zealand, the UK and the Eurozone, giving these economies more room to cut. As a result, currencies in those areas are falling.

Benchmark Currencies

In September, I speculated that currency moves would cause damage to hedge funds taking large currency bets. We are now seeing damage to speculators. The Australian and New Zealand Dollars have already fallen precipitously versus the U.S. Dollar, leading the Hong Kong-based financial trader Citic Pacific to take $2 billion in rogue trading losses. Now, we can see monumental moves in the Pound, the Euro and the Canadian Dollar (see red circles in chart above). More fallout is likely.

The only currency that is holding its own is the Japanese Yen. Marshall Auerback believes the U.S. Dollar and the Japanese Yen are both going higher for different reasons.

The Dollar is rising in part due to an unwind of dollar-denominated debt that international financial institutions are unable to refinance in this credit environment. This is one reason that the Fed has loaned unlimited funds in U.S. Dollars to the Swiss Central Bank and the European Central Bank.

The Yen seems to be rising because of the unwind of the “carry trade” as Japanese retail investors realize that interest rate convergence is happening and they can no longer invest abroad safely at high rates of interest.

Whatever the reasons for the recent moves, they are dramatic and someone somewhere is nursing some very big losses.

Related articles
Currency Bets Gone Bad Hit Companies in Developing Economies – Naked Capitalism
Citic Pacific Under Investigation After Currency Loss – Bloomberg

  1. Wag the Dog says

    they are dramatic and someone somewhere is nursing some very big losses.

    Such as all those people who bet on hyperinflation sinking the dollar or had bought a whole lot of gold recently during the recent panic. Gold has just dropped below $750/ounce. But wait long enough (>2 years?) and inflation may eventually win out and the goldbugs can claim victory. Jim Rogers is buying up the cheap commodities in expectation this will eventually happen.

    Price of government bonds in Europe are slowly rising on the interest rate cutting expectation. UK gilt yields are dropping ahead of tomorrow’s auction. Looks as though there are still plenty of buyers for all the extra government debt that will be issued in the wake of banking bailouts.

    Oh, and what will this strong dollar mean for American exports? Will USA forever be the consumer engine of the world now that imports look even more attractive? And is the temptation to outsource more American jobs all the more irresistible?

  2. Edward Harrison says

    The rise in the dollar is not good. It is rising against everything right now. In my estimation, this makes deflation more of a threat down the line.

    And the exports that you speak of. Also not good.

    Right now, there are so many moving parts that it is hard to discern what will happen next, honestly.

    That said, I do think the next show to drop will come from somewhere tangential like Hungary or Latvia or Argentina. But, this may lead to a renewed sense of panic and another leg down in the crisis.

    Policy makers are advised to get well ahead of this one and relying on stimulus packages is not going to do the trick.

  3. Andy says

    Good article, though I think in the longer term a weaker dollar will return. As I wrote recently, the rapid rise of the US dollar in the near term is a result of the flight to safety to US treasury’s due to the global financial meltdown (yes people short the dollar are suffering!). This just shows despite America’s longer term challenges it is still viewed as the financial bastion of the world. Hard to believe with the all the institutional collpases, but in Red, White and Blue we trust.

  4. Edward Harrison says

    Andy, you’re on to something because, ultimately, the dollar is a weak currency given the amount of money that is going to have to be pumped into the economy. Remember that the ECB can’t match the Fed in inflating the money supply.

    As for why the dollar is rising, I am skeptical abut the safe haven status. I think a lot of it has to do with a realization that interest rate differentials are going to come down as Europe and elsewhere weakens. And, add to this the need for dollars to refinance foreign financial institutional debt requirements a you have the (temporary) makings of a dollar rally.

    The Dollar was way oversold at 1.60 to the Euro. But, I am astonished at the severity of the move.

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