Dollar Loses Appeal for Investors

Last week, pressure on the dollar continued in the currency markets, as further easing of monetary policy in the U.S. became increasingly likely, causing the value of the American dollar against a basket of currencies to fall to its lowest level this year.

The dollar index, which shows the value of the American dollar against six major world currencies, fell by 1.0 percent last week to 76.49 points, and on Friday at one point dipped to just 76.14 points, the lowest level since December of last year. In this context, it weakened by 0.35 percent against the European currency, pushing the euro exchange rate up to 1.3980 dollars. On Thursday, it broke above the psychologically important level of 1.41 dollars for the first time since January.

Against the Japanese currency, the price of the dollar fell by 0.62 percent to 81.40 yen. On Thursday, the dollar exchange rate fell to 80.88 yen, the lowest level in 15 years and only about 1 yen above 79.75 yen, the record low level it hit in April 1995. The euro also weakened against the Japanese currency by 0.27 percent, bringing its exchange rate down to 113.90 yen.

The dollar is under pressure from heightened expectations that the U.S. central bank, the Fed, will initiate a new cycle of monetary policy easing and interest rate cuts, which is causing the American currency to lose its appeal for investors. These expectations were solidified after Fed Chairman Ben Bernanke stated on Friday that high unemployment and low inflation indicate the need for further easing of monetary policy.

“If there are no significant changes in other areas, it seems there are reasons for new measures,” Bernanke said. The Fed chief confirmed the central bank’s readiness to take measures to revive the economy through the purchase of government bonds, but emphasized that Fed officials must approach the decision on the size and pace of the purchase program cautiously. Many economists predict that the Fed will announce a new program at its next meeting scheduled for November 2 and 3. The dollar was also pressured on Thursday by the announcement from the Singapore central bank that it would continue a “moderate and gradual” appreciation of the Singapore dollar, along with a slight widening of the trading range.

“Traders are now essentially trying to factor in the Fed’s new stimulus measures into the exchange rates, so it is difficult to foresee where support for the dollar might come from in the short term. Additional support for the euro and pressure on the dollar were generated by Singapore’s decision to widen the trading range of its currency,” says Joshua Raymond, an analyst at City Index.

Traders also point out that the euro strengthened under the influence of comments from European Central Bank (ECB) Governing Council member Axel Weber, who recently emphasized the difference between the Fed’s policy and that of the ECB. “The ECB is the only central bank that even mentions the withdrawal of stimulus measures, which helps the euro,” comments RBS currency strategist Ankita Dudani. Due to the weak economic recovery, central banks around the world have intervened in recent weeks to prevent the rise of their currencies, which reduces the competitiveness of their exports. This has sparked speculation about a currency war.

The euro could ultimately be the loser in a currency war, warns analyst Kathleen Brooks. “The ECB’s stance that it should continue with plans to withdraw additional liquidity from the European financial system is driving up interbank lending rates in Europe. This is in direct contrast to the situation in the UK and the U.S., where expected new monetary stimuli from central banks are putting downward pressure on rates near record low levels, supporting the rise of the euro,” says Brooks. (H)