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US Dollar hits lowest level of the year

By  Paul A. Ebeling, Jnr
AseanAffairs     15 October 2010

"Hot Money" is the new capital problem for government policy makers in some developing Global economies. 

The "greenback" sank against most major currencies Thursday, prompting warnings that the weakness of the world’s reserve currency could destabilise the global economy and push other countries into retaliatory devaluations to underwrite their exports.

Increasing speculations the U.S. Federal Reserve will pump more money into the U.S. economy next month under a policy known as Quantitative Easing (QE-2) sent the U.S. dollar to new lows against the Chinese renminbi, Swiss franc and Australian dollar. It dropped to a 15- year low against the yen and an 8-month low against the Euro.

The dollar index, which tracks a basket of currencies, reached its lowest level this year.

A senior European policy-maker, who asked not to be named, said a further aggressive round of monetary easing by the US Federal Reserve would be “irresponsible” as it made U.S. exports more competitive at the expense of its rivals.

The US dollar’s fall was given fresh impetus after the Monetary Authority of Singapore surprised the market when it tightened policy by widening the trading band for its currency, allowing it to appreciate. The move by the Singapore authorities, responding to fears over inflation, helped push up other Asian currencies.

Russia’s finance minister Alexei Kudrin, in a meeting with European Union officials, blamed the US, and others, for global currency instability. He said one reason for exchange rate turmoil “is the stimulating monetary policy of some developed countries, above all the United States, which are trying to solve their structural problems in this way”.

Commodities, which are mostly traded in dollars, were boosted by the US currency’s slide. Copper hit a two-year high of US$8,490 per tonne at one point, while gold surged to a record of US$1,387 oz.

The twice-yearly U.S. Treasury currency report, to be published Friday, could ramp up the debate, although it is likely to stop short of accusing China of manipulating its currency.

However, turbulence was contained in the currency markets, as equities are benefiting from expectations of more QE-2. Investors hope that the fresh flood of money will find its way into stocks.

The QE-2 factor and the strong start to the US earnings season propelled the FTSE All World Index to highs last seen in September 2008. This index has risen 20 percent since the start of July.

US inflation expectations for the next 10 yrs also continued to climb, reaching 2.09 percent, up from 1.90 percent in the past week.

The US dollar fell to Rmb6.6493 against the Chinese Renminbi, dropped to SFr0.9461 against the Swiss franc and fell to $0.9993 against the Australian Dollar, just shy of parity. The Canadian dollar reached parity with the U.S. currency, last seen in April. The US Dollar fell below Y81 against the Japanese Yen and tumbled to US$1.4121 against the Euro. The Dollar index dropped nearly 1 percent at one point to 76.259, its lowest since December.

By

Paul A. Ebeling, Jnr