When the US government announced the passage of the legislation authorizing the US$700 billion bailout plan in September, most people thought that the US dollar would fall because of the consequential increase in supply of US dollars. To their surprise, the US dollar strengthened sharply against Euro and many emerging market currencies. However, it strengthened against the yen, as can be seen in the following graph.
Why did the US dollar strengthen against Euro? Perhaps because Europe is looking weak also and ECB is signaling it will cut interest rate. But if they do not cut faster than the US, there should be no change in interest rate differential. Hence, the strengthening of the dollar vs. Euro may reverse if the market has priced in a faster rate cut by ECB compared with US than what is going to be actually realized.
Why did the US dollar strengthen against emerging market currencies? The general thinking is because investors sold assets considered more risky and change the proceeds back to US dollars, investing in US treasuries instead. It seems that the selling of foreign equities has been the case, for example, with Indian stocks, and then Indian Rupees. But the Philippine stock market is so small that even with massive withdrawal from the stock market, the impact on the pesos should not have been as strong as has happened. Furthermore, with the peak remittance season coming soon, I am doubtful that the US dollar can maintain its strength against the Philippine pesos.
Why did the US dollar weaken against Japanese yen? The interest rate differential theory also seems applicable here. The interest rate of yen is so low that there is probably no room for any rate cut. When US cuts interest rate, then keeping money in yen does not look much worse than keeping money in US dollars. Japanese investors may have simply converted their US dollars back to yen, creating demand for yen and strengthening its exchange rate as a result. Any body out there has data that supports or refutes these theories?
Some interesting discussion on the main exchange rates can be found in : http://www.learncurrencytrading.com/fxforum/usd-jpy/13858-discuss-usd-jpy-dailyfx-analyst-124.html
2 comments:
It seems that the demise of Lehman Brothers in September was one of the main causes of the sharp market drop in October, and also the drop in commodity prices in that month. Many hedge funds used LB as banker, and when LB went into bankruptcy, their accounts got frozen. So they had to get money out anywhere they can, emerging bond and stock markets, commodities, US stock market, impacting not only the stock markets but also the currency markets.
If this theory is correct, then when LB's bankruptcy case is resolved, market is ready for a rebound, correct?
Other must be inform about this things. This will surely affects our daily living. Thanks for sharing, hope to more post of yours.
Philippine Peso Exchange Rate
Post a Comment