The strange case of the descending dollar

Δημοσιεύθηκε: 12 Αυγούστου 2013 - 18:43

Call it the strange case of the descending dollar. Just as everyone had concluded that the US economy has turned the corner, that its banks were fixed and that the Federal Reserve will soon start withdrawing stimulus, the dollar tumbled 5 per cent.

Despite some support for the greenback in recent days, it remains almost exactly in the middle of the range it has been stuck in since Lehman collapsed nearly five years ago.

This is not what was supposed to happen. Dollar bulls have been preparing for a repeat of the strong runs of the early 1980s and 1990s but the currency lost the plot.

It is not a murder mystery. Rather, the story has changed. The dollar weakness is not about the dollar at all but about optimism in the UK and eurozone, and doubts about Japan amid its tax rise debate.

The three currencies make up 83 per cent of the dollar index, the imperfect but widely used measure of the greenback.

Against the euro, the dollar has followed the script exactly, tracking the gap between US and German two-year yields.

Higher US Treasury yields - the 10-year is at 2.58 per cent, up from below 1.5 a year ago - have not been matched in the short-dated bond market. The Fed might withdraw stimulus but the market is not pricing a rate rise for almost two years.

Meanwhile, the German two-year yield, negative in May, has risen to 0.17 per cent - twice the move in the US two-year. Europe is shifting from crisis to recession to mere stagnation. The eurozone may be bad but it is less bad.

In the UK, some are betting that recovery will push the Bank of England to abandon its new policy of forward guidance and bring forward rate rises.

Investors have to decide if sterling, the euro and the yen are mere subplots, gaining unwarranted attention while senior traders are at the beach. Next month offers plenty of opportunities for the markets' literary critics, with the Fed likely to reduce bond purchases and President Barack Obama probably revealing his pick for next Fed chairman.

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