Currency traders shift attention the Middle East
at 2005-11-12 23:55:02
In recent years, Asia’s current account surplus with the US has ballooned, and Asian Central Banks’ collective holdings of USD now exceed $2 trillion. While currency traders continue to monitor this situation closely for signs that Asian Central Banks are planning to diversify their reserves, the focus is slowly shifting to the Middle-East, which is expected to run a current account deficit comparable to that of Asia. Thus far, Middle-Eastern countries have been quick to take the proceeds gained from higher oil prices and reinvest them in US Treasury securities, resulting in a net effect of zero on the USD. If oil prices remain high, and Middle Eastern countries find themselves awash in profits, it is extremely likely that they will begin to diversify their foreign exchange holdings, at which point the USD will suffer. The Times online reports:
The Middle East [is now] in the same league as Asian central banks - heavy hitters in the currency markets because of t
USD run could continue into 2006
at 2005-11-12 23:55:02
As the USD continues to reach fresh highs against major currencies, forex traders are beginning to wonder if and when it will all end. The consensus, to the chagrin of Dollar bears, is that the USD will continue to appreciate, possibly into 2006. Traders cite a few factors. First, the Homeland Investment Act has already spurred the repatriation of $200 billion in foreign profits, a figure which is expected to double before year end. This massive inflow of capital that is currently being held overseas represents an enormous potential boon for the USD. Next, interest rate differentials between the US and other developing nations are expected to widen further before year-end, as part of the Fed’s effort to rein in inflation. Juxtapose this with decreasing prospects for an ECB rate hike, and a picture of a smooth-sailing USD begins to emerge. The Financial Times reports:
Expectations of ever-widening yields between the US and the eurozone played their part, particular
Civil unrest in France threatens Euro
at 2005-11-12 23:55:02
For almost two weeks, France has been plagued by rioting, who have burned vehicles by the thousands and clashed with police. Economists and political analysts are now beginning to asses the political and economic implications of the civil unrest. Several have speculated that the rioting will spread to neighboring European countries, which would significantly disrupt the Euro-zone economy. Currency traders are also beginning to react to the riots, in theorizing that they are indicative of negative sentiment towards the French economy. If these riots are not soon quashed, the Euro will likely continue to suffer. Reuters reports:
“Concerns about the ongoing riots in France, to the extent they are a reflection of the social consequences of prolonged anemic growth in the eurozone, may also be playing some role in limiting the euro’s ability to benefit from improved interest rate support.�?
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Brazilian Real continues to soar
at 2005-11-12 23:55:02
The Brazilian Real surged to a 4 ½ year high against the USD today, on the heels of strong economic growth and stratospheric interest rates. Brazil is currently among the strongest economies in the developing world, often lumped in the same category as China, India, and Russia. Investment in fixed capacity has spurred significant increases in production and exports, and hence, GDP. In addition, Brazil’s federal funds rate currently exceeds 19%, a level that has made foreign creditors all too eager to lend to Brazil. In fact, Standard and Poor’s, an international rating agency, recently raised its rating on Brazilian government bonds, a move which will surely suck in more foreign capital, and provide additional support for the Real. The Financial Times reports:
The real was further aided by a government announcement that it planned to sell more bonds maturing in 2015, a move likely to increase portfolio inflows into Brazil even further. The real has now risen 31
US records record trade deficit
at 2005-11-12 23:55:02
In September, the US recorded its worst trade deficit ever, of $66 Billion. The chief causes of the aberrantly large trade deficit were hurricane Katrina, high oil prices, and a strike at Boeing. The closing of ports that occurred during Katrina as well as the strike at Boeing, which combined to reduce net exports by $4 Billion, would seem to be isolated incidents and will not likely impact the balance of trade in the future. Soaring oil prices, on the other hand, may remain high for quite some time, and represent a structural, more pronounced change in the balance of trade. Until members of OPEC decide that they would prefer to hold Euros over USD, however, the Dollar should be safe.
"The trend over time is likely to remain for a wider trade gap generally," said Ian Morris, US economist at HSBC in New York. HSBC said that the worse-than-expected trade deficit may drag growth in the third quarter down from about 3.8 to 3.4 per cent.
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