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The dollar’s drop from a five week high against the euro is being blamed mainly on speculative reports that show that American retail sales and manufacturing falling as the global economy continues to deepen. The dollar also fell for the first time in days against the British pound, and Federal Reserve Chairman Ben S. Bernanke finally stated that a changed government fiscal policy is not going to lead to economic recovery. The Fed feels that the American government is going to have to find some way of stimulating more growth.
“The dollar is giving back some gains after a recent rally,” said Ian Stannard, currency strategist in London at BNP Paribas SA, the largest lender in France. “Comments from Fed policy makers and bearish views on the data this week may have triggered the selling. I see the correction as short-lived. Longer term, the steps taken by the U.S. will help the dollar.”
How bad did the dollar fall? It fell to $1.3236 euro from $1.3182, 89.43 yen from 89.38, and to $1.4501 against the pound. Stannard feels that the dollar could fall further against the euro on Wednesday, January 14, 2009, possibly closing at $1.3350.
Bernanke stated in a London speech that ‘strong measures’ are what is needed to stabilize and strengthen the weakened financial system. “More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets.” American retail sales fell for sixth months straight in December, the longest decline since 1992 when this type of information started to track.
“We expect U.S. retail sales to worsen significantly,” said Masafumi Yamamoto, the head of foreign-exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader. “There’s a high chance that the dollar will face renewed selling pressure versus the yen.”
Analysts are forecasting that the ECB will lower its 2.5% main rate by at least a half a percent point as early as Thursday, possibly deeper. The ECB has only cut rates 1.5% since the beginning of 2008 while the Fed cut theirs by 4 percentage points. Even the Bank of England has only lowered theirs to 1.5%. “There are a lot of orders to sell the euro,” said Akio Shimizu, who is the chief manager of foreign-exchange trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s largest publicly listed bank. “Interest-rate cuts are likely and that is weighing on the euro. There’s not much good economic news coming out of Europe.” He went to add that the euro could decline to $1.3100 before the end of trading today.The dollar’s lending rate is not fairing well and it declined to its lowest number in more than 4-1/2 years in Asia on Monday, even though it continued to trade with a wide enough margin over the official lending rates to suggest that maybe cash was not being circulated as freely as it should’ve been during stable financial times. Additionally, the swap spreads on the dollar continued to tighten bringing them to their narrowest since the middle of 2007. Analysts say that tightening was due to the grim job data that showed unemployment at a close to 16 year high on Friday. This data has investors and traders expecting the Federal Reserve to keep their rates near the zero margin for a long time.
The interbank American dollar rates in Singapore hit their lowest number since April of 2004 and the 3-month SIBOR was still around 108 basis points higher than the usual effective overnight federal funds rate. Amy Auster, the head of international economics research at ANZ, said about the rates, “Conditions are normalising somewhat though LIBOR is still at a hefty premium to the fed funds rate.” Auster feels that the rates probably would not return to normal until closer to the end of 2009 and that narrow and broad money indicators are pointing towards cash that is being hoarded by banks on a global scale instead of being circulated through the economy. The rates on the 3-month dollar funds in Singapore fell to 1.195% from 1.29714% on Friday, January 9. The 3-month LIBOR was traded at a spread of 1.08% points over the overnight indexed swap.
With the dollar swap spreads tightening, the two year dollar swap spread is currently at 54.75 basis points, the tightest it has been since August of 2007. This was when the effects of the subprime mortgage collapse were just starting to be felt. This spread is over 100 basis points from its widest in October 2008.
The central bank in Australia is still waiting to receive bids on a $10 billion repurchase tender as of Monday, 12 January 2009. Analysts feel that this suggests the demand for the American currency’s liquidity is ebbing from the high and intense levels of 2008. Katie Dean, a strategist at ANZ, feels that banks simply may not be interested in borrowing the 28-day dollar from Australia’s Reserve Bank at the 0.65% rate it is offering. Interbank rates are considerably lower with the 1-month LIBOR weighing in at 0.3% on Friday, January 9. “Because LIBOR rates have come in quite a bit, it now means it effectively is cheaper for banks to access the money market than to access the RBA. There is clearly better functioning of U.S. dollars through the markets,” Dean said.
Investors are starting to bet on an even steeper fall in interbank rates with the LIBOR rates declining regardless of the optimism being felt over the new stimulus measures the incoming Congress is getting set to announce in the United States after President-elect Barack Obama’s inauguration at the end of January.
