We have identified two forces lifting the US dollar: positive developments in the US and negative developments elsewhere. Last week’s ECB meeting and next week’s FOMC meeting, however, are not the driving forces presently.   Â
Three issues dominate the foreign exchange market. First, the risk Scotland voting for their independence next week is a major force. It continues to weigh on sterling, were a new, albeit marginal lower, for the move was recorded in the European morning, ostensibly on back of reports (Guardian) suggesting that Rupert Murdoch may be supporting the independence movement and may use his media assets, like the Scottish Sun to express his views.Â
Second, disappointing economic data and verbal official encouragement has seen the yen slump.  The dollar has risen to new multi-year highs near JPY106.80. This is a three yen move since the end of August. The official jawboning appears to have been stepped up recently. Partly, it appears defensive. Clearly, the ECB was not only talking down the euro, but the negative rates may be encouraging, as we have suggesting, the use of the euro as a funding currency, or short-leg of cross positions. Â
Partly, with inflation stalling and the economy weakening, more juice is deemed necessary. We have highlighted the likely fiscal response in the form of a supplemental budget, but many others still expect the BOJ to step up its efforts as well. Having had expected it by the end of July, many observers now think by the end of October. We are less sanguine, and instead see the weakening of the yen as likely to renew the upward drift in prices. Â
Earlier today, Japan reported prices fell 0.2% in August.  The consensus was for a flat reading. When excluding the effect of the sales tax, the year-over-year rate slipped to 1.1% from 1.4%. Separately, machine orders rose 3.5% in July, which was a bit below expected. However, the year-0ver-year rate rose to 1.1%, the first positive reading since April.Â
