Mar

23

 On the day, the U.S. dollar is trading generally better versus the majority of currencies after the initial weakness posted by the FOMC. I am wondering whether the expected return profile augurs for a more significant strengthening in the U.S. dollar in the days and weeks going forward.

While not significant on its own, it is interesting to note that there are several examples in the past six years where the Euro has made a new high or very close to it, failed, and then had a period of notable weakness. See below for a rough outline. In combination with other factors such as: what seems like a universal bearish U.S. dollar sentiment; likely improving U.S. balance of payments as the trade account improves with the slowing U.S. economy and the capital account remaining strong; and future interest rate expectations in the respective countries already pricing a wide divergence in rate paths.

One clear major risk is an all out liquidation of U.S. assets. And with that the capital account would deteriorate more than the improvement in the current account, leading to a weakening in the U.S. dollar.

                                 High                  Low

July 19 2002              1.0199

September 20 2002                            .9613

March 14 2003           1.1083

March 21 2003                                   1.0504

May 30 2003              1.1933

September 5 2003                              1.0764

October 10 2003         1.1860

November 7 2003                               1.1377

February 20 2004       1.2926

April 30 2005                                      1.1761 

December 31 2004      1.3666

Februay 11 2005                                 1.2732

March 11 2004           1.3482

July 8 2005                                         1.1868

September 2 2           1.2589

November 8 2005                               1.1640

June 9 200                 1.2979

July 21 2006                                       1.2458

December 8 2006      1.3367

January 12 2007                                 1.2868
 

Mar

23

It is interesting to note that the Yen is stronger overnight with JGB yields higher. There have been some marginally better Japanese data of late (land prices, etc.). Predictively, I wonder if this portends some consolidation/correction in carry/assets after recent runups.

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