Recently, faith in the Dollar has been put to the test. There have been doubts about the US and it’s ability to come out of this thing on top…doubts about America’s “AAA” rating. Then the job numbers came out today, and the US Dollar bounced back in style, gaining up to 1.8 % on the Euro at the end of what would have been a pretty horrible week, otherwise. What gives?
Over the last couple of weeks, as the global economy continues to move upwards (I think we can all agree that, at the very least, the bottom is in), we have seen a huge backlash against the strength of the US Dollar. The sentiment has flipped. Previously, we had people being pessimistic, and only coming out to play when there was significant good news. Now, everyone is getting in, and only slowing down when there is significant bad news.
So, yes the dollar’s weakness is, to a large extent, the by-product of confidence. The Volatility index has dropped considerably recently. It’s all good. However, there are other factors at play. This has been more evident in certain currency pairs than others.
Take the British Pound. It was clear that the drop in the Pound against the Dollar was much more extreme than circumstances demanded. At various instances in the last few months of the year, there was some back-and-forth between the UK and the rest of Europe as to who would fare better as the recession became more contracted. The UK suffered more, in the long run…and so did the pound. While fighting the trend when trading is not exactly a good idea, the pound was always going to stage a major comeback once all the negativity was reduced. And so it has…in a big way.
Last week, both the Pound and the Euro were helped along by their respective central banks. Why? Because there was no rate-cut. This is a signal that the banks think that whatever action they have taken is enough…that there is no need to do more. It means that things are getting better in their eyes. That was a big boost. Any rate-cut would have meant potential currency weakness. That didn’t happen. Instead, both currencies rose in value.
The same goes for the Commodity currencies. Australia, New Zealand and Canada…none of their economies took as much of a beating as the US. Once the dust settled, commodity prices were always going to rise, as was Oil. It has reached over a 7 month high now (Gas costs are starting to hurt my wallet again. oh, well. It was good while it lasted). Commodity prices will continue rise as well.
What we have been seeing here is normalization. The dollar got much too strong, not because of any real merit on it’s part, but simply because it was the safer choice. Now, it is no longer necessarily the only one. There was a bit of an uproar because of all the talk about the US losing it’s “AAA” Credit Rating. The fact is that things will not go back to normal here, or anywhere else for that matter, for some time yet. But things are getting better…everywhere. Naturally, people (particularly those who ran here in fear) will come out of US-based assets and spread them round. At some point, things will balance out.
Some normality returned because of the numbers out of the US. Though the unemployment is at historic lows, the rate of loss was just not as bad as people thought it would be. End result: The US will still be a leader on the way out of this thing. Forex Traders flocked back to the Dollar…some of their senses restored after good old-fashioned mob-mentality took over for a moment.
The US dollar might still have some value to lose before it returns to a reasonable level, but any sudden moves should be off the table…for now.