Can’t Keep A Good Buck Down

The dollar’s brief and shallow pullback provided a new buying opportunity.  The greenback is putting the finishing touches on another strong weekly performance. Of the major currencies, only sterling and the yen have managed to hold their own, and are flat on the week.  

The dollar-bloc continues to under-perform.  The New Zealand dollar lost about 3% this week, through the European morning. The Aussie is off 2%, and the Canadian dollar fell 1.5%. This seemed to be a function of unwinding of stale positions, joined by momentum traders.  RBNZ officials stepped up their jawboning against the currency, while the RBA signaled macro prudential efforts to cool the housing market (which was understood to mean not monetary policy).  

The ECB has made no bones about it.  A weaker euro is an important element in the effort to reflect the regional economy, and help re-anchor inflation expectations. Swiss officials have made it clear too that it will not allow the Swiss franc to strengthen much against the euro. Some Japanese officials, including Prime Minister Abe, and earlier today, Cabinet Secretary Suga, have tried to either slow the yen’s descent or demonstrate that fundamentals not verbal intervention is the main driver of the yen’s weakness.  

Currency markets are in play, and outside of that occasional journalist reference, there is not much talk of “currency wars”.  NY Fed President Dudley did comment earlier this week about the foreign exchange market, but a close reading of what he said does not show a resistance to dollar strength. First, his comments were conditional. He prefaced his remarks with “if the dollar strengthens a  lot”. Second, his comments were typical boilerplate stuff:  A significant appreciation of the dollar would have consequences for growth and inflation, and this would have to be taken into account in setting monetary policy.  

There does not seem to be a push back against the dollar’s strength.  From an economic point of view, the key is the dollar’s performance on a broad trade-weighted index.  It is at the upper end of the a three-year range, which is still in the trough of a large decline. Coming into this month, the Federal Reserve’s broad trade-weighted dollar index was up less than 1% from the end of last year. It rose sharply this month, but in the bigger picture, the impact on growth and inflation seems mild by any definition.