Thursday March 17, 2016 - 18:53:27 GMT
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Currency Wars: is there a Secret Plan to Weaken the US Dollar?
We have noticed for some time that the US dollar was not responding in the typical way to events that would typically send it higher. The first key event was the Bank of Japan cutting rates to negative and the JPY confounding the market by strengthening. The USDJPY fell 10 big figures following the initial knee jerk reaction up. Other events such as the strong February US employment report and the ECB aggressive easing saw similar short-lived US dollar gains that were quickly reversed. Then there was the surprise dovish tone to the FOMC statement on March 16 that sent the dollar into a tailspin.
This has led to some chatter that there is a secret agreement to weaken the dollar. One source cited the recent G20 meeting as a place where this was agreed on. I can see the logic behind a weaker dollar if it leads to a rise in commodity prices, lifts inflation and eases pressure on emerging market currencies. While this logic seems a stretch, it is curious that there has been little in the way of verbal intervention out of Japan given the strength of the JPY. The dovish FOMC statement and the clumsy way Fed Chair Yellen tried to explain it was a surprise to just about everyone. If the goal was to weaken the dollar, it had the desired effect.
So, is there a coordinated behind the scenes effort to weaken the dollar? I personally would be surprised but as noted above, one could make the case that there is some hidden force that has prevented US currency from moving higher.
In the meantime crude oil has rebounded and led a bounce in commodity prices while the dollar has moved lower. Whether this is just a swing within wide ranges, especially for the EURUSD, which has essentially traded within 1.05-1.15 for a year, remains to be seen. For now, the dollar has moved to the defensive so watch the reaction to news as this will give you a clue whether current weakness has more to run.
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