Brown Brothers on Dollar Weakness

October 6th, 2009 8:16 am | by John Jansen |

I have previously excerpted pieces of analysis by Brown Brothers on the currency market. With stories circulating about the demise of the greenback as well as the unexpected rate increase from Australia I thought that the write up today was pertinent:

There is a UK press story suggesting a secret meeting has been held between numerous Gulf states, Russia, China and France ostensibly to develop a multi-year plan to ditch the dollar for oil and use the euro, yuan, yen, and the Gulf Common Currency.  Numerous countries took the unusual step to respond to the unsourced press reports and denied the charges. Most countries, including Japan, Saudi Arabia, UAE, and Russia have denied the allegations.  Of course, the conspiracy-minded among us will see the denials as a further confirmation.  Yet there are numerous reasons to be very skeptical.   First there are numerous technical challenges, including that the yuan is not convertible and the GCC does not exist and there needs to be some “seasoning time”.  Managing such a currency basket has proven very difficult in the past and would require a whole new bureaucratic apparatus to manage.  Second, and more important than technical difficulties, it is not clear that it is in many of these countries interest to cut the role of the dollar.  As Robert Mundell once note, “great powers have great currencies”.  With Iranians seemingly moving inextricably towards acquiring nuclear capability, the unresolved wars in Iraq and Afghanistan, the other dimensions of US power capability may also be relevant.  The US dollar did seem to respond negatively to the press report, but this seems to be more a case of participants using the “stories” to do what they wanted to do in any event and that was to sell dollars.  As we noted, the greenback was vulnerable as interest rate differentials incentivized many to be short the dollar and the G7 simply repeated their standard comment about the volatility in the foreign exchange market which gave the clear impression officials were not prepared to act on the dollar’s weakness.  This removed some of the event risk posed by some of the individual expressions of concern.

Today’s RBA rate hike had been partially priced in before the event yet there was no knee-jerk reaction in which the Australian dollar was sold on the fact. One reason for the US dollar’s weakness is that the market was already predisposed to sell the buck given the low risk of intervention, post G7.  The RBA hike and Gov Swan’s hawkish statement also reminds the market the US is lagging behind Australia and the Norges Bank where both are expected to hike in Q409.  The RBA move reinforces the reason for US dollar weakness; that interest rate differentials continue to favor selling the US dollar against the foreign currencies.

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  1. 6 Responses to “Brown Brothers on Dollar Weakness”

  2. By Bob on Oct 6, 2009 | Reply

    FT also has a summary of market commentary on the USD. http://ftalphaville.ft.com/blog/2009/10/06/75836/the-world-and-the-dollar-reacts-to-robert-fisk/

  3. By bergs on Oct 6, 2009 | Reply

    Some corrections to this AUD/RBA commentary

    1. The market moved to pricing a hike the day prior to the RBA announcement. Those with a good feel have been of the view for some time that Oct would see a hike.

    2. Swan is not the RBA Governor. Swan is the Australian Treasurer. The RBA Governor is Glenn Stevens.

  4. By cyclingscholar on Oct 6, 2009 | Reply

    Thanks for the comment about ‘great powers have great currencies.’ The US should continue to be the moral, economic, political and military leader of the world. With this commitment—i’ll leave the politics to the politicians!—the rest of our problems will take care of themselves.

    The ‘Gulf states, Russia, China and France?’ What is THAT…a compendium of every economic and military basket case since the industrial revolution?

  5. By bergs on Oct 6, 2009 | Reply

    Cycling Scholar.. you’re kidding right?

  6. By Al on Oct 6, 2009 | Reply

    naw, he’s just ignorant

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