Euro’s Rise due to Optimism?

The Euro’s rise against the USD over the last year has been swift and unimpeded.  Many commentators have theorized that it is intense pessimism surrounding the US economy and economic conditions-namely the burgeoning twin deficits-that is responsible for the Dollar’s demise.  Now, a new theory is being batted around, one that is quickly gaining traction with analysts:

Economic woes plague Dollar

The story behind the Dollar’s decline contains two threads:
narrowing interest rate differentials and growing concerns surrounding the US economy. With most of the industrialized world’s Central banks not scheduled to meet again for a few weeks, the interest rate story can temporarily be placed on hold in favor of the economic story, which is becoming uglier every day. The centerpiece remains the US housing market, which many analysts believe will soon slide into a major rut. There is a great deal of uncertainty over whether homes can retain their value and if borrowers will be able to pay off their mortgages. Rising rates have squeezed many low-income, high-risk borrowers, causing a crisis of growing proportions in the market for mortgage-backed securities, which is at risk for spreading to other areas of securities markets. Forbes reports:

“Credit concerns, rating reviews, yields tumbling; it has been one-way traffic against the dollar in recent minutes and euro/dollar has rallied up a fresh all-time high.”

Read More: Dollar slump sends euro

Big Mac Index Offers Currency Valuations via PPP

The Economist just released its an updated iteration
of its famous Big Mac Index, underscoring growing disparities in currency valuations. For those of you that aren’t familiar, the Big Mac Index uses the price of a McDonald’s Big Mac sandwich in different countries as a proxy for measuring purchasing power parity (ppp), that perennial staple of economics that theorizes a country’s currency and its inflation rate should move in opposite

China to Float the Yuan?

Since it was freed from its fixed exchange rate regime two years ago, the Chinese Yuan has appreciated nearly 9% against the USD. While the Yuan’s exchange rate is clearly managed by the Chinese government, many commentators agree that its rise has given off the aura of a floating currency. One economist thinks China will cement this perception the conclusion of the Beijing Olympics-to be held in 2008-and allow the

US Economy Hit by Housing Sector

These days, the US economy seems to rise and fall on the wings of the housing sector.  Unfortunately, this sector is in a tailspin as higher interest rates have left many homeowners unable to pay their mortgages, causing a crisis in the oft-cited subprime market.  Already, several hedge funds have nearly collapsed due to subprime mortgage

Bank of England Raises Rates

The Bank of England raised interest rates for the second time in as many months yesterday, to 5.75%. As a result, the UK has widened its lead over the US as the country with the highest interest rates in the industrialized world, after New Zealand. Moreover,  the UK is becoming an increasingly viable alternative to the US as a target for risk-averse investors. The British Pound is hovering around a record high against the USD, which can probably expect to suffer prolonged decline against the world’s majors if it falls behind in attracting risk-free foreign capital. The Financial Times reports:

“The statement accompanying the rate hike gives few firm clues as to future interest rate movements, with the Bank of England…concluding that the risks to the inflation outlook are still tilted to the upside.”

Read More: BoE rate decision boosts pound

Commentary: Interest Rate Parity catches up with USD

Most commentators assume that the only thing currently keeping the USD afloat is high interest rates. While attractive rates have certainly encouraged an inflow of (risk-averse) foreign capital in the short term, they may ultimately be harming the currency in the long-term. In fact, the economic law of interest rate parity dictates that currencies and interest rates should move away from each other in the long term. Stated

Commentary: Interest Rate Parity catches up with USD

Most commentators assume that the only thing currently keeping the USD afloat is high interest rates. While attractive rates have certainly encouraged an inflow of (risk-averse) foreign capital in the short term, they may ultimately be harming the currency in the long-term. In fact, the economic law of interest rate parity dictates that currencies and interest rates should move away from each other in the long term. Stated