Dollar Strong as Talk of Coordinated Rate Cut Looms
by Nicholas Adams Judge
Monday marked one of the most chaotic days ever for the world’s financial markets. The Dow Jones Industrial Average at one point briefly dipped into -800 territory before buy-backs began, as US markets followed Asian and European markets down in a major value correction.
Traders in general finally acknowledged what forex traders had been seeing for weeks now: The major European economies are in serious trouble. The dive in the value of European stocks was spurred by European governments’ lack of a coordinated response to the crisis.
(Here’s a general hint – whenever currency values depend on EU countries coordinating policy in a majorly important, short-term way, always bet against that happening. The EU has spent a lot of PR money fostering the image of a tightly knit community of policy interests. As a counter-example to that image: they don’t even have an extradition treaty worked out among member nations… When countries can’t agree on rules to expedite common criminals, it’s doubtful they’ll be able to respond to crises in a meaningful way.)
The Euro fell to its lowest level against the Yen since 1999, and also fell to 14 month lows against the US dollar.
The Yen proved to be the day’s big winner, and Japanese traders were predicting the Yen will rise even further in the days to come. Japanese banks have been, of course, relatively unscathed by the direct effects of the sub-prime crisis.
Generally speaking, Bloomberg’s currency page looks more like a list of currencies that the Yen and US dollar happily slapped around like defenseless schoolchildren on Monday. Brazil’s Real fell to its lowest rates since 2006. The Loonie felt the pain of declining oil prices. Iceland’s Krona dived as rumors flew about Nordic Banks having to rescue the island’s economy with a coordinated response. Turkey’s Lira was hit by fear-induced capital flight. The Russian Ruble has fallen to 18 month lows against the dollar, and Mexico’s Peso “Plummeted.”
Speaking of the Mexican Peso, I overheard a reporter on CNBC say today of the Euro, “This is not a correction, this is a re-valuation. This reminds me of what used to happen to the Mexican Peso.”
It is never a good sign when the Euro is compared to the Mexican Peso of yester-year. It’s sort of like He-Man being compared to Mr. Magoo.
Riding to the rescue of this near-global near-free fall is, hopefully, a coordinated response by the world’s major central banks. No doubt led by the Fed, there is talk of at least 50 basis points being shaved off of key rates. It is doubtful we’ll witness much in the way of collective action problems since, firstly, the need to cut rates right now is universally understood. Secondly and more importantly, there is a very real sense among the world’s central bankers that (1) both Europe and the other major western economies are in serious trouble and (2) action needs to be as visible as possible maximize the impact any action would have on frozen credit markets.
Australia and New Zealand’s currencies were also hit by the flight to safety today. Australia’s current fate is particularly surprising, given the huge increase in gold’s value seen both today and in recent weeks. Indeed, forex traders should keep a sharp eye on Australia’s dollar. As gold has shot way up, the Aussie has fallen 25% in the past quarter.
It is likely to fall even further today – that is October 7th, Pacific time – as the central bank is expected to announce a rate cut later in the day. This disparity will, in the medium-to-long term, no doubt lead to strong upward pressure on the Aussie.
About the Author - Nicholas Adams Judge
Nicholas Adams Judge is an editor and analyst for OnlineForexTrading.com. He is a Phd student at the Political Science Department at the University of Wisconsin - Madison. His research interests include political economy, statistical methods and American politics.
