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Assessing the dollar’s weakness
Posted by John McDermott on Apr 12 18:33.
How weak is the dollar?
A timely question asked by Goldman Sachs on Tuesday morning, what with the euro reaching a 15-month high of $1.45 earlier today. Indeed, on the face of it, there is weakness everywhere.
For example, the carry trade is back, realises the FT. The Australian dollar was at a record high of $1.0582 against the US dollar yesterday, before slipping today. Positioning data from the CME shows a record $9.4bn worth of bets made in the week to April 5 on AUD appreciation.
Tuesday’s Goldman- and IEA-driven contractions may yet dampen the flight to commodities currencies, of course.
Meanwhile, the dollar index dropped to a 15-month low of 74.838, within sight of the record low of 71.329 it hit in April 2008, reports the FT:
With all these “records” going around Goldman is keen to put them in context for the intuitively-challenged amongst us:
It is therefore normal that many FX market participants appreciate broad USD weakness but without intuitively getting the sense of new record levels being reached.
The EUR/$ and Cable trades are still, respectively, 9.7 per cent and 22.2 per cent below the record levels from late 2007 and early 2008, says Goldman, adding that Sterling is still 37 per cent below historic highs. The dollar index also has a way to go, it points out:
This impression is also supported by the levels of the most widely followed Dollar index, the DXY, which is still some 7% away from a post-Bretton Woods low. The index stands at a level of about 75 compared to an intraday record low of 70.7 in March 2008.
More importantly, the dollar index is less relevant given its decidedly Old Continent weighting, argues Goldman.
The issue with the DXY, however, is that it is far from representative for the world we live in today. It used to be the old Fed index from the 1980s and hence reflects the trade weights from that period, where most of the world trade crossed the North Atlantic, where Emerging Markets were troubled by serial crises and headlines were dominated by the cold war. The Euro and Sterling account for 69.5% of the trade weights and by adding the smaller regional currencies SEK and CHF, the total weight of European currencies rises to 77.3%.
Instead, we should be focusing on trade-weighted indices, which ostensibly correct for inflation. These, however, do show the dollar at record lows:
There are several real TWIs, including our GS TWI or the one calculated by the Fed. They all show consistently that the broad traded weighted Dollar is at historical record lows – clearly weaker than at the previous record lows in early 2008.
Goldman estimates that the US dollar is undervalued by 13 per cent on a trade weighted basis. But they don’t have much hope that a reversion to the mean will happen any time soon:
We also still note relatively weak investment inflows, as summarised in our BBoP analysis. And in terms of monetary policy differentials, it appears the Fed will remain one of the most dovish central banks globally; hence likely the Dollar will not get any support from these two sides either.
Remember that mentioning gold is a yellow-card offence on FT Alphaville.
http://ftalphaville.ft.com/blog/2011...lars-weakness/
Assessing the dollar’s weakness
Posted by John McDermott on Apr 12 18:33.
How weak is the dollar?
A timely question asked by Goldman Sachs on Tuesday morning, what with the euro reaching a 15-month high of $1.45 earlier today. Indeed, on the face of it, there is weakness everywhere.
For example, the carry trade is back, realises the FT. The Australian dollar was at a record high of $1.0582 against the US dollar yesterday, before slipping today. Positioning data from the CME shows a record $9.4bn worth of bets made in the week to April 5 on AUD appreciation.
Tuesday’s Goldman- and IEA-driven contractions may yet dampen the flight to commodities currencies, of course.
Meanwhile, the dollar index dropped to a 15-month low of 74.838, within sight of the record low of 71.329 it hit in April 2008, reports the FT:
With all these “records” going around Goldman is keen to put them in context for the intuitively-challenged amongst us:
It is therefore normal that many FX market participants appreciate broad USD weakness but without intuitively getting the sense of new record levels being reached.
The EUR/$ and Cable trades are still, respectively, 9.7 per cent and 22.2 per cent below the record levels from late 2007 and early 2008, says Goldman, adding that Sterling is still 37 per cent below historic highs. The dollar index also has a way to go, it points out:
This impression is also supported by the levels of the most widely followed Dollar index, the DXY, which is still some 7% away from a post-Bretton Woods low. The index stands at a level of about 75 compared to an intraday record low of 70.7 in March 2008.
More importantly, the dollar index is less relevant given its decidedly Old Continent weighting, argues Goldman.
The issue with the DXY, however, is that it is far from representative for the world we live in today. It used to be the old Fed index from the 1980s and hence reflects the trade weights from that period, where most of the world trade crossed the North Atlantic, where Emerging Markets were troubled by serial crises and headlines were dominated by the cold war. The Euro and Sterling account for 69.5% of the trade weights and by adding the smaller regional currencies SEK and CHF, the total weight of European currencies rises to 77.3%.
Instead, we should be focusing on trade-weighted indices, which ostensibly correct for inflation. These, however, do show the dollar at record lows:
There are several real TWIs, including our GS TWI or the one calculated by the Fed. They all show consistently that the broad traded weighted Dollar is at historical record lows – clearly weaker than at the previous record lows in early 2008.
Goldman estimates that the US dollar is undervalued by 13 per cent on a trade weighted basis. But they don’t have much hope that a reversion to the mean will happen any time soon:
We also still note relatively weak investment inflows, as summarised in our BBoP analysis. And in terms of monetary policy differentials, it appears the Fed will remain one of the most dovish central banks globally; hence likely the Dollar will not get any support from these two sides either.
Remember that mentioning gold is a yellow-card offence on FT Alphaville.
http://ftalphaville.ft.com/blog/2011...lars-weakness/
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