Wednesday, December 08, 2004

The US dollar's big slide has been on hiatus for the past week. Per the major currencies index, the USD has been stable since Thanksgiving (Nov. 25). Unfortunately the Financial Times didn't know that and thinks the greenback has been plunging steadily for two months.
The beleaguered US dollar staged a broad-based rally in European morning trade on Wednesday as speculators banked profits in the belief that the greenback�s slide had gone too far, too fast. . . .

�Over the past couple of months, the currency market has basically ignored interest-rate differentials. The FX market has focused solely on policymakers� concerns about the US current account deficit,� said Kenneth Landon at JP Morgan.

�Yesterday�s sharp rise in US dollar/Canadian dollar following the BoC policy meeting may be a tentative sign that the currency market may be starting to consider factors other than the US current account deficit, at least when it comes to growth-oriented currencies.�
More likely the speculators got cowed by the power of central banks. Consider that many central banks were seen shoring up the dollar earlier this week: South Korea, Brazil and Argentina all bought dollars, and strong "verbal intervention" came from the Japanese, Taiwanese and Europeans.

And "too far, too fast"?? Again per the major currencies index, in early 2002 the dollar fell 10% over three-and-a-half months. In Spring 2003 it fell 8% in just six weeks, and in early Fall 2003 repeated the feat. This time around the dollar fell 7% over six weeks. That's not an unusual occurrence.


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