Euro hovers near all-time high

The Euro is currently hovering above its all-time high against the USD, and is flirting with levels never-before-seen in the Euro’s brief, eight-year history.  The Euro had
toyed with the record for the last couple of weeks, before finally breaching it upon last Friday’s release of US GDP data, which indicated the US economy had weakened to its slowest pace of growth in over four years. Investors are now waiting to see how the Fed responds to this latest development, as the bank has found itself in the unenviable position of navigating rising inflation and a slowing economy. Reuters reports:

Benign inflation data and modest growth in Midwest business activity provided more evidence of slowing U.S. economic growth, keeping sentiment bearish for the dollar, traders said.

Read More: Dollar stays near record low vs euro in quiet
trade

Dollar Hinges on Economic Data

This week witnessed a flurry of economic data, capped by tomorrow’s scheduled release of employment and GDP statistics.  At the beginning of the week, the perennially pointless monthly durable goods statistics indicated a rise in durable goods orders, which Dollar bulls interpreted as a good sign.  However, real estate data indicated a lower-than-expected rise in new home sales as well as a dramatic decline in the sale of existing homes.  Polled economists are predicting that tomorrow’s news will likely fall into the dovish category, painting a picture of an economy that has already peaked and making the case for the Fed to hold interest rates at current levels.  However, the bond markets are still pricing in 1-2 rate hikes over the near-term, which currency markets may use to prop up the Dollar.  The Daily Reckoning reports:

Money supply growth has a negative impact on the dollar. Inflation is a currency killer, and looking at the broadest measure (M3), money supply growth is out of control.

Read More: Currency Markets Take a Rollercoaster Ride

Commentary: USD will decline in long-term

In recent years, the performance of the USD has been dismal. The currency is near historic lows against most of the world’s major currencies (with the notable exception of the Japanese Yen), and in fact, just yesterday, the USD dropped to a 15-year low against the British Pound.  And yet, it is my belief that when all is said and done, the USD will have fallen much further in value.  You are probably wondering, ‘If the USD has already depreciated significantly, how could it still be overvalued.’

Commentary: USD will decline in long-term

In recent years, the performance of the USD has been dismal. The currency is near historic lows against most of the world’s major currencies (with the notable exception of the Japanese Yen), and in fact, just yesterday, the USD dropped to a 15-year low against the British Pound.  And yet, it is my belief that when all is said and done, the USD will have fallen much further in value.  You are probably wondering, ‘If the USD has already depreciated significantly, how could it still be overvalued.’

Pound Surges to 15-Year High

Since 1992, two macroeconomic events had not occurred in Britain: price inflation has no exceeded 3% annually and the British Pound has not surpassed the $2 barrier.  Both events were realized today, however, as an early-morning release of economic data indicated inflation in Britain was hovering around 3.1% and the British Pound quickly rose above 2 USD/Pound.  Interest rate futures also witnessed an immediate correction, to the extent that the markets are now pricing in a British benchmark interest rate of 5.75% 6 months from now, .5% above the current rate.  Meanwhile, US inflation statistics were dovish, suggesting the gap between British and US interest rates is set to widen, which should propel the Pound further upwards.  The Financial Times reports:

There is little that is inevitable about currencies moving in line with expected interest rates and nothing in long-term trends that allows people to predict currency movements in connection with inflation and other variables. But on Tuesday, the currencies moved exactly as if they were linked to the inflation figures by an umbilical cord.

Read More: Pound rises on prices and rates fears

China’s forex reserves surpass $1.2 Trillion

Last fall, China’s reserves officially surpassed the $1 Trillion mark, a watershed event that would have been nearly unthinkable several years ago.  This week, China announced that its reserves now exceed $1 Trillion, having grown by almost 40% year-over-year and showing no signs of slowing.  Most of the increase can be attributable to growth in China’s trade surplus, which now exceeds $40 Billion, on a quarterly basis.  China

Brazilian Real surges to 6-year high

Six years ago, Brazil’s economy was in shambles, annual price inflations routinely exceeded 10%, and Brazilian interest rates were hovering around 20%.  Its currency, the Real, traded at roughly 4/USD.  Flash forward to the present: Brazil’s economy is now on solid footing, inflation has been held in check, and Brazilian asset prices are strong.  The result is a much stronger Real, which has doubled in value since 2002. Of course, many analysts have been quick to point out that the Real is benefiting from high commodity prices, which are unlikely to be sustained in the medium-term.  The Financial Times reports:

Brazilian assets suffered during recent nervousness over the troubled US mortgage market. But this seems to have passed and confidence in the global economy and strong commodity prices have caused a return of investment flows.

Read More: Brazilian currency set to hit fresh peak

BOJ spurs carry trade

To no one’s surprise, the Bank of Japan has announced that it would maintain Japanese interest rates at the current level of .25%.  Carry traders seized upon the opportunity to continue borrowing Yen at near-record lows, and selling the Japanese currency in favor of higher-yielding alternatives.  In fact, the news was met with such gusto that the Euro was almost immediately propelled to an all-time high against the Yen, which

USD to be driven by economic data

Most analysts reckon that the USD has resumed its downward path against the world’s major currencies, after a two month hiatus.  The fear is that the mess in the real estate market (via subprime mortgages) will spread to the rest of the economy, with loan defaults and a decline in consumption.  In such a case, the Federal Reserve Bank would be forced to cut interest rates dramatically in order to prevent the US from sinking into a full-fledged recession, which would decrease the relative attractiveness of US assets.  Traders will be eying a couple pieces of economic data this week for any indication as to the direction of the economy. 

The Wall Street Journal reports:
This week’s data parade is bracketed by two key releases: Monday’s national report on U.S. manufacturing activity in March from the Institute for Supply Management and Friday’s payrolls report.

Read More: U.S. Economic Reports Could Ease Dollar’s Woes

China reconsiders reserve diversification

China, which recently unveiled plans to set up an agency under the aegis of the state that would manage the country’s surging forex reserves, is having second thoughts of sorts.  While the plan to more actively manage its reserves remains on coarse, the likelihood that this result in diversification has been somewhat diminished.  Estimates of the fraction of China’s reserves held in USD-denominated assets fall in the 70% range, which