Dollar Soars On Divergence

The US dollar is beginning the New Year with strong gains against both major and emerging market currencies. The divergence between the US and the other high income countries has been underscored by comments from the BOJ’s Kuroda and ECB’s Draghi. The former discussed other tools that can be brought to bear to achieve the BOJ’s 2% inflation target.  

The latter reiterated that the ECB was committed to adjusting the size, speed and composition of its balance sheet if needed, and he left no doubt that he thought it was needed. The risk of not fulfilling the ECB’s mandate, Draghi says is increasing.  

Even though Tokyo markets were closed for the holiday still, the dollar bounced to JPY120.50. Recall that on December 30, amid year-end positioning, the dollar had slipped briefly below JPY119.00. Technically, the dollar is poised to re-challenge the JPY121.85 high set in early December.  

The euro is drawing closer to the $1.20 psychological level. Draghi’s comments and the slightly disappointing PMI manufacturing survey took the euro to $1.2035. The North American session will likely have another go at it. We note that it is not just private sector participants who are selling the euro. The IMF’s COFER Q3 data showed reserve managers are diversifying out of the euro, though the 7.5% depreciation of the euro may have exaggerate this trend but the direction is clear.  

The aggregate December manufacturing PMI came in at 50.6, down from the 50.8 flash reading. The German reading matched its flash report of 51.2, which follows the sub-50 (49.5) November performance. France disappointed. The flash had already deteriorated to 47.9 from 48.4, and in the final reading slipped further to 47.5. Italy also disappointed, moving deeper into contraction territory. Its December PMI fell to 48.4.  There had been some expectations of an improvement from the 49.0 reading in November. Rounding out the large eurozone members, Spain remains the strongest at 53.8, but this is down from 54.7. Here too the consensus had looked for a small improvement.