I wrote last on 7th October, expecting Dollar’s up move coupled with down move in Equity, Commodity and Bullion markets.
Dollar Index has soared 5% since then from the low of 74.39 to yesterday’s close of 77.50. In currency market, 5% move is considered a big move.
Yesterday, the FED retained its March deadline of completing the $1.25 trillion in mortgage-backed securities purchases and $175 billion of federal agency debt. Officials are gradually slowing the pace of purchases . Thus, signaling the withdrawal of emergency measures taken in 2008 to support the financial sector. This has short term positive effect on dollar.But, the real test will be: Will the Fed really end mortgage- backed securities purchases by the end of the first quarter? need to be seen.
Equity, Commodity and Bullion have remained sideways to 1-3% correction.
Will $ continue rally??
Yes. In short term Dollar may continue rally against major currencies. Dollar index is pegged against six major currencies of world markets.
1. Euro 2. Sterling 3. Swiss Frank 4. Canadian Dollar 5. Japanese Yuan 6. Australian Dollar
Out of six, four regions are facing major debt concerns.
1. Euro Zone
Below shown table illustrates true picture of the Euro zone health.
Greece’s predicament has escalated concerns about contagion in other European countries whose finances are in poor shape. Just this month, the ratings of Greece have been cut both by Fitch Ratings, and, late Wednesday, by Standard & Poor’s, and major agencies have warned Spain and Portugal of possible cuts.
Greece borrowed $2bn privately issuing bonds to national banks as against a normal fund raising through bond market. Greece did so because investors were demanding higher yield amid further concerns of downgrades.
This clearly shows the seriousness of situation.
Greece has been downgraded to BBB+ by S&P, the lowest in the euro region, and signaled it may be cut again.
Situation is more or less same across the eastern European nations.
Budget Deficit has ballooned to 11% plus and Debt to GDP ratio approaching higher on the scale, faster in England, Ireland, Portugal and Spain.
2. England ( Sterling )
UK’s large debt mountain and 13 % fiscal deficit has invited strong downgrade concerns from rating agencies.
In latest remark, Fitch said, Fitch Says U.K. Rating Most at Risk Among Top-Rated,citing concern over the country’s budget deficit.
3. Swiss Frank
The nations of Hungary, Poland, and Czech Republic used cheap Swiss funds in the mortgage funding, and concerns are mounting of default on sovereign debt.
The base Swiss interest rate of 1.5% pumped money into Eastern European homes. Their local currencies each fell around 40% to 60%, making for a total disaster for Swiss bankers. Translated mortgage losses are in the 70% to 80% range.. In fact Swiss bankers are struggling to achieve their equilibrium after deep damage in three aspects: toxic US bonds, devastating Eastern European mortgages, and threats to private bank accounts
4. Japanese Yen
The Bank of Japan began a solo effort to defend the US-dollar, by pumping 10-trillion yen ($115-billion) into short-term bank deposits on Dec 1st, – flooding the system with yen, and in turn, forcing US$ carry traders to cover over-extended short positions. “If there is a shortage of liquidity we are prepared to provide more funds,” Shirakawa warned, driving Japan’s five-year yield to 0.45-percent, a four-year low.
Japan is aiming 88.25 exchange rate against dollar to stabilize the exports market.
The IMF says Japan’s public debt could reach 227% of the size of its economy in 2010, greater than the annual output of Germany, France, Britain, and Canada combined. Japan’s government has lived beyond its means since the 1990’s thanks to a massive pool of domestic savings. Households own 1,440-trillion yen ($16.3-trillion) in assets, mostly deposited in banks, which then buy government bonds. Foreigners only hold about 8% of outstanding JGB’s.
5. Australian Dollar
Australian Dollar has risen more than 30 % against US Dollar. Hence, it seems, AUD will pare some gains as Investors will take out profit on year end.
Therefore, it seems, in short term Dollar may continue gain some more percentages before decline.
But, the larger picture is, i long run all nations will debase their currency or will get debased due to the rising deficits and rising debt to GDP ratio.
Let’s look at IMF data and its view on further rise in these ratios.
|IMF says debt-to-GDP ratio of advanced countries to rise by 20 percentage points in 2009 – – biggest upturn in decades
Jun 11, 2009
In short term, Dollar will continue uptrend. Because, countries pegged to dollar index seem to be more in trouble than US.