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The Yen has inverted a downward trend against the Dollar in recent months that by itself is noticeable, attending to the fact that interest rates in Japan are close to zero.
As for the other Asian currencies, are you sure they are not pegged to the Dollar?
Luis,
The Hong Kong Dollar, Taiwanese Dollar, Renminbi are all pegged to the dollar. Currencies like the Indonesian Rupiah are (to my knowledge) not pegged, but generally 'heavily influenced' by their central banks to remain closely tied to regional Asian currencies (and hence the USD). The Japanese have no formal stated policy of currency targeting BUT given that the Japanese economy is still domestically weak and hence very dependent on exports, the Japanese government are VERY reluctant to see the JPY appreciate to any degree against the Asian currencies (and hence the USD). Hence both in terms of 'soft intervention' = central bankers and finance ministers' rhetoric and ultimately 'hard intervention' = selling JPY for USD in the forex market the Japanese will not allow the yen to strengthen against its Asian peers.
Thus, ultimately, the whole of Asia is tied to the USD.
All of the Middle East is also tied to the USD, since the large petro-exporters there (with the exception, since just recently, of Kuwait) peg their currencies directly to the USD or to their (USD-pegged) peers.
So, what can the USD weaken against? The only currencies 'left' are the major South American currencies - the BRL and MXP - the Antipodeans - the AUD and NZD and some others like the ZAR, RUB, CHF. Basically the Euro stands out as the obvious direct competitor of the USD, though. It has a big, efficient, liquid, well-regulated capital market which the other currencies I have mentioned before - BRL, MXP, AUD etc. - do not (to some degree or another). Thus the Euro is directly taking all the strain of the USD weakening.
I agree with your comments about the USD/EUR looking 'overbought' at current levels (just on short-term technicals). But I do think that 1.47-1.50 is a distinct possibility within 12 months.
Regards,
Cuchulainn
Thanks for adding this info Cuchulainn.
I (and probably most other people) was expecting 1.40 by years’ end the soonest, and there you have it in September still. If the trend is accelerating we can see all those scenarios pretty soon, I fear.
I agree with you that the Japanese will do everything to keep the Yen from running up, but it seems to me that it’s pretty much out of their control at the moment with the rates as low as they are now.
My reasoning about the Euro is the following, if the other major currencies move along, the countries with Dollar-pegged currencies will simply move to a basket of currencies (like Kuwait did) and avoid launching the Euro through the roof. If the Euro is found to be the only real alternative to the Dollar, Europe can be headed for a whirlwind.
So who gets hurt more by the depreciation of the dollar versus the Euro, Americans or Europeans? Nixon's treasury Secretary John Connelly said about the dollar prior to Bretton Woods, "It's our currency, but it's your problem".
Now it may be everybody's problem. But the pain may be felt in Europe first. And Europe's only option for reducing that pain may be to try to pressure China to let the Yuan appreciate, which will meet with strong resistance.
I still expect this is headed for a negotiated solution, Bretton Woods Two.
The dollar may be the poison gas, but Europe is the canary in the coal mine.
Yeah Jack, that's a good point that many people don't see. If the Euro goes through the roof we are in big trouble. But the US will feel it too, because foreign resources (especially energy) will become inaccessible.
The Bretton Woods Two is a good idea and possibly the only reasonable way out of the current mess. I hope it is possible.
Luis: There are problems associated with a fundamentally strong currency (Euro) and there are problems associated with a fundamentally weak currency (US dollar). The difference is that with a strong currency there are options (lowering interest rates, printing of said currency). With a fundamentally weak currency there are no easy fixes.
Brian you're conceptually right, but as I wrote, we have interest rates at 4%, there's not that much room to steer.
Luis: A global bidding war for declining oil exports is looming- a powerful currency is very important in that bidding war.
Luís,
Bretton Woods Two is a good idea, but it won't happen. The US fundamentally changed around 1975 with the dismantling of the Bretton Woods agreement. Prior to that the US was interested in helping the world. "Rising tide lifts all ships" and what have you. After that the US shifted to a zero sum game with the IMF, World Bank, WTO, off shoring, etc.
I don't know what the plan is. I don't know how this is going to play out, but the US was a generally positive force from WWII to 1975. Then from 1975-Gulf War II it was a generally negative force with an ostensibly positive mission. I expect that in the coming years the US will drop the pretense and become an overt tyrant.
Tim
"It saddens me that this brave experiment in self governance is failing" -my next door neighbor.