Economics Exchange Rates Commentary Essay

NEW YORK (Dow Jones)The sawhorse continued its cut Wednesday, touching its lowest level in 12 months against the euro and flagging against the hurt as rising equities battered the greenback yet again.The vaulting horse has lose discover legs of support over the past two weeks as supporting(a) global economic info has led investors to assume more(prenominal) try and buy superior-yielding assets. With the recession receding and financial markets in recovery, investors have break d give birth more confident theres no longer a need to hold their money in a safe-harbor currency manage the long horse.Because of the Federal Reserves need to stimulate the delivery, the dollars ultra-low interest grade have made it the lowest-yielding major currency. The cost of borrow U.S. dollars in the capital of the United Kingdom interbank market continued its slide Wednesday. The key three-month London interbank slayered judge marked its lowest level since the British stickers Asso ciation archetypical introduced its Libor fixings in 1986.The dollar hit its lowest level against the ballpark currency since September 2008 in new York afternoon trading, with the euro touching a 12-month high at $1.4738. If the euro is able to sustain levels above $1.4720, a key technical level, it could be on a march to $1.50, express Carl Forcheski, crippledness president for foreign ex deepen at Societe Generale in New York.The dollars losses were broad, sinking to new 13-month lows against the Australian and New Zealand dollars as well as lows for 2009 versus an opposite(prenominal) widely make outd counterparts. The U.K. pound also piggy-backed off the euros gains to advance on the dollar.The yen had been the so-called carry mountain currency of choice, moreover with U.S. interest rates expected to remain feeble until 2010, analysts anticipate the dollar to continue funding riskier bets. A carry trade involves buying a lower-yielding currency to fund purchases of hig her-yielding assets.The dollar was also burthen Wednesday by comments from Japans incoming finance minister, Hirohisa Fujii, who give tongue to he saw no need to substitute in currency markets to leave office the yen. In the past, the dollar had received support from the belief that Japan would intervene to prevent unwanted appreciation of its currency. Theres no change in my thinking that its not the succession to consider foreign-exchange intervention, Fujii said at a news conference.Though he wouldnt shape out intervention in what he termed really abnormal situations, Fujii said the idea that the yen should be cheaper for the sake of Japans exporters is wrong. Wednesday afternoon in New York, the euro was at $1.4729 from $1.4667 late Tuesday, according to EBS via CQG. The dollar was at Y90.78 from Y91.06. The euro was at Y133.72 from Y133.60. The U.K. pound was at $1.6506 from $1.6495, while the dollar was at CHF1.0306 from CHF1.0340.U.S. economic data released Wednesday, i ncluding as-expected August consumer price index and better-than-expected industrial production numbers, pointed to a proceed recovery, wind instrumenting stocks to rally. The Dow Jones Industrial Average rose 108 points, lending support to the euro and other high-yielders.The dollar looks likely to continue its broad-based slide through the rest of the year, analysts said. As long as the buck doesnt fall too uttermost too fast, dollar weakness is expected in a time of loose monetary policy, said Adnan Akant, a currency specialist at money manager Fischer Francis Trees & Watts, a New York unit of BNP Paribas. Right now, the euro and other higher-yielding currencies are reaping the benefits of a global economic turnaround and stock market rallies, but within the next 12 months, the dollar should start benefitting from a recovering U.S. economy, said Wells Fargo analysts.The Canadian dollar ended higher near its strongest levels of the day Wednesday, reflecting another sustained fl ight into riskier assets like stocks and commodities at the expense of the slumping U.S. dollar. The U.S. dollar was trading at C$1.0666 late afternoon, from C$1.0721 late Tuesday.Strong gains for oil, gold and other commodities as well as rising North American equity markets underpinned the Canadian dollars gains, although the currency again failed to mount a serious challenge of its year-to-date high at C$1.0639, achieved in early August.CommentaryThe article refers to a depreciation of the dollar against major currencies due to ultra-low interest rates and change magnitude risk by investors.The Federal Reserve has been neat interest rates in an attempt to boost substance demand and stimulate the economy. lavishly interest rates in an economy generally set ahead enthronization in that currency as the value of the investment funds get out affix over time. Currently US interest rates set by the Federal Reserve are around 0.25% compared to the European Central Banks 1%. Becau se of this, investors have switched to higher yielding currencies, much(prenominal)(prenominal) as the Euro, and to a lesser extent the Pound, causing a fall in the long horses exchange rate. This is shown in Diagram 1.As the draw shows, a right shift in the supply of the dollar bill leads to a fall in its price relative to the Euro.In addition, the aforementioned cutting of interest rates is an expansionary monetary policy used to manipulate aggregate demand. The trade off of this policy is increased inflation. A high rate of inflation might further decrease investment in sawbuck assets as the real value of the investment would decrease over time. During time of economic crisis, investors tend to invest in low risk assets such as generally strong currencies like the dollar. However with signs that the global economy is exiting the recession and in recovery, not only does the demand for safe-harbor currencies like the dollar decrease, but there is an increased demand for high risk investment due to bullish speculation.In addition, some consumers, firms, or foreign aboriginal banks might believe that despite the improving economic situation, the Dollar bequeath continue to fall as the article mentions and sell dollar assets. This bearish speculation would further increase the supply of the dollar and perhaps lead to self-fulfilling omen.As shown above, the combination of the three factors leads to a sharp fall in the exchange rate. As previously mentioned, this depreciation could cause a self-fulfilling prophecy in which the initial bearish speculation leads to depreciation, which in turn causes more bearish speculation causing the exchange rate to enter a downward spiral. Initially, the Federal Reserve might not intervene but if the depreciation continued, it would be forced to buy back Dollars to counteract the increases in supply. This would slow the depreciation, discouraging people from selling dollars. It might even constrain bearish speculation as some might assume the dollar market will bottom out and start to appreciate.The depreciation of the Dollar should benefit the US economy by means of an improved up-to-the-minute account deficit. Initially, the deficit will worsen as the demand for deductions and exports is nonresilient in the short run, but eventually the current account oddment will improve as US exports become more competitive. US export revenue will increase while expenditure will fall. This improved current account situation will boost AD leading to economic growth. This is shown below in Diagram 3.Diagram 3However, as the diagram shows, in the long run, there will be the trade off of inflation as AD bears. This might encourage Federal Reserve to strengthen the Dollar to reduce imported cost-push inflation. In addition, the increased demand for US exports will increase the demand for the Dollar causing appreciation. Foreign nations might eventually implement import controls such as tariffs on US goods i n order to preserve their own current account balances.Eventually, the Dollar should regain its status as a high-yielding currency 1 . The value of one currency expressed in term of another 2 . A period in a business cycle following a recession, during which the GDP rises. 3. Believing that a particular security, a sector, or the overall market is about to rise 4 . Revenue from the exports of goods and services and income flows is less than the expenditure on the import of goods and services and income flows in a given year