America Wants a Weaker Dollar to Avoid Deflation

With a new series of poor U.S. macroeconomic indicators, the dollar exchange rate continued to slide against the euro on global currency markets last week and hovered around its lowest level in the last 8 months against the yen, while investors await new directions from the Fed and the Bank of Japan.

Last week, the euro exchange rate against the dollar jumped 1.8 percent to 1.3278 dollars, while against the Japanese currency, the price of the euro rose 0.5 percent to 113.5 yen. The dollar index .DXY, which shows the value of the dollar against six major world currencies, slightly decreased compared to the previous week by 0.04 percent to 80.38 points. The American currency, however, strengthened against the yen by 1.13 percent to 85.47 yen. However, during the week, the dollar exchange rate dipped to 85.03 yen, close to its lowest level since November last year of 84.82 yen.

Currency traders also point out that a drop in the dollar exchange rate below 85 yen could pave the way for its decline to historically low levels below 80 yen, which were prevalent 15 years ago. Many believe it is only a matter of time before the dollar falls to those levels given the differences in the positions of American and Japanese lawmakers regarding exchange rates, analysts say.

“The biggest reason for the dollar’s decline against the yen is the fact that the U.S. clearly wants a weaker dollar. Washington wants a weak currency because it will help the economy avoid deflation,” emphasizes Ayako Sera, a strategist at Sumitomo Trust & Banking.

However, analysts note that there are no strong purchases at the current dollar and yen exchange rate, as there is increasing speculation that Japanese authorities may intervene to protect the competitiveness of their exporters. A series of poor U.S. indicators from last week signals that the recovery of the world’s largest economy is losing momentum.

Data on personal consumption and income indicated that Americans are still very cautious about spending their money. After a slight increase in June, personal consumption and income of Americans stagnated in July. Orders to the U.S. industry also fell in June by 1.2 percent, about twice as much as economists expected. The number of existing homes sold has also decreased.

At the end of the week, it was reported that 131,000 Americans lost their jobs in July, which is double what analysts had estimated. For new directions, investors will closely monitor the regular monthly meetings of the Fed and the Bank of Japan next week. Some market participants speculate that the Fed could even further ease monetary policy at its meeting on August 10 by renewing the purchase of treasury bills and mortgage bonds. At the same time, they doubt that the Bank of Japan will further ease monetary policy at its meeting on August 9 and 10. The key interest rate in Japan has been at a record low of 0.1 percent since December 2008.

Stronger economic growth in Asia and Europe, compared to the slowing recovery in the U.S., leads many currency investors to conclude that central banks in those regions may raise interest rates before the Fed. “The employment report in the U.S. increases the chances that the Fed will further quantitatively ease monetary policy to stimulate economic recovery. Nothing favors the strengthening of the dollar exchange rate,” assesses Joe Manimbo, an analyst at Travelex Global Business Payments. (H)