The United States dollar is one of the worldâs leading currencies in the world. Some though believe that the viability of the dollar is being threatened by various obstacles, economic, social, political, and otherwise. Some economists even predict that it could become completely obsolete in the not-so-distant future. What has made some of the worldâs most trusted experts come to this conclusion about a currency that, in the past, has been a symbol of stability and steadfast dependability? What does this mean for the American economy and for the rest of the world?
Is the US Dollar âstrongâ enough?
First, we need to understand what it means to say that a currency is strong. When a particular currency is strong, it essentially means that people trust it and are willing to leave their assets in the form of that currency. If the United States dollar is strong, it means that people believe it will more or less maintain its value relative to the other currencies around the globe.
People are willing to hold dollars for long periods of time, because they are not afraid of them losing their value. Usually, this is measured quantitatively by looking at exchange rates with other countries. If it costs a lot of Euros (or a lot of any other currency) to buy one dollar, it can be said that the dollar is strong.
But how are exchange rates determined? The Forex market works like any other market; that is, prices (or in the case of money â exchange rates) are based on where supply and demand meet. Since the âsupplyâ of most currencies is determined by the central banks who print the money, the dominant factor is demand for the currency.
When there are many investors who want to do business in one currency, they exchange their own currency for the desired one. This drives demand upward, and the price, or exchange rate, for the desirable currency increases. In this way, the strength of a currency is intimately tied to the strength of the economy.
Is it worth to leave your assets in USD?
When talking about the US dollar, the biggest cause for concern is that foreign investors are becoming less and less willing to leave their assets in the form of dollars. Sometimes, there are entire countries, as is the case with China that leaves portions of their assets in dollars.
When it appears that the United States economy is not doing well (the United States entered a severe recession in 2008, the consequences of which are still being felt), investors know that the currency is unstable and look forward to exchanging their dollars for other currencies. Thus, the demand for the dollar is in danger of taking a plunge when no investors want to deal in it.
Making matters far worse is the fact that the United States government is at an unprecedented level of national debt. If the United States comes to the point that it will no longer be able to pay back its debts to other countries, it will be the domino that sets the destruction of the dollar in motion.
The dollarâs value in the foreign exchange market will tank, and the buying power of the dollar will be virtually zero. Some economists fear that the dollar has already started down this path, and that to fund its debts the United States Federal Reserve is simply printing more money. The problem with that â it can be a short-term remedy. It increases the supply of dollars in the foreign exchange market, driving the exchange rate of the dollar down further, leading to a downward spiral that leads to nowhere except deeper debt.
In this case, even if the US actually could pay back its debts, it wouldnât matter. As long as investors donât see the dollar as valuable, the game is over because the dollar has lost its value. Soaring gold prices are evidence that even many average people are sceptical about the dollarâs value and want to hold their assets in another form.
The future of the US dollar will depend on how responsible the government is in attempting to get out of debt and on whether or not the US economy will continue to grow and thrive. If not, many Americans and anyone who still holds his assets in dollars will be in a world of trouble.
With only enough cash on hand to keep the country afloat for just another month or so, the noose is tightening on Greece. The next aid installment – approximately 30 billion euros – is desperately needed to meet upcoming debt obligations, but is contingent upon Greece first implementing a further 11 percent in spending cuts.
Meanwhile, the results of the election earlier this month failed to result in a clear winner leaving the country absent an effective government when a strong voice is most urgently needed. With new elections not scheduled until June 17th, the likelihood of Greece meeting the spending cut target in time to ensure the next tranche of emergency funding is doubtful. Should this result in a significant delay or outright withdrawal of support, Greece will be unable to meet its next round of debt repayment obligations thereby forcing the country into an uncontrolled sovereign default.
Given the measures Eurozone officials have already undertaken to protect against a Greek default, it is difficult to understand why now, after having already committed billions to the effort, Greece would be permitted to fail.
Certainly, in public, politicians continue to pledge their support to keeping Greece within the fold; but, for the first time, highly-placed officials are daring to suggest that Greece’s continued participation within the Eurozone may not be guaranteed.
Last weekend, a policymaker with the European Central Bank, Irish Central Bank member Patrick Honohan, stated that while a collapse in Greece would have an immediate impact on the Eurozone, the damage could be contained. This is significant as it is the clearest instance yet of an ECB member acknowledging that a Greek exit from the region is a potential outcome.
“Technically, it (a Greek exit) can be managed. It would be a knock to the confidence for the euro area as a whole, so it would add to the complexity of the operation until things settle down again”, Honohan noted in an address to an audience in the Estonian capital of Tallinn. “It is not necessarily fatal, but it is not attractive,” he said.
On Wednesday, ECB President Mario Draghi told reporters in Frankfurt that, on the question of Greece leaving the euro, it was not for the ECB’s Governing Council to determine if Greece should or should not remain. According to Draghi, the ECB executive will “continue to comply with the mandate of keeping price stability over the medium term in line with treaty provisions and preserving the integrity of our balance sheet.”
Drahgi noted that the original agreement that created the Eurozone did not have a provision for a member nation leaving the union. Therefore, Draghi said the question of Greece’s continued participation within the Eurozone “is not a matter for the Governing Council to decide”.
Nevertheless, this apparent shift in tone is very telling and signals that there is a growing acceptance that efforts to save Greece have failed. Reading even more into the latest comments, it seems that there is even an acceptance of the inevitability of a Greek default.
As a result, the message has morphed to one of containment; yes, the repercussions of a Greek failure are significant, but are still manageable according to the ECB. What is key now is to prevent a “chain reaction” contagion should Greece return to the drachma.
After all, if Greece fails, what is to prevent the much larger, but equally challenged economies of Spain or even Italy from falling to a similar fate? And while it may very well be true that the Eurozone could survive the exit of Greece, to lose one of the larger economies would surely spell the end of the euro.
US Retail Sales rose in April at the slowest pace of the year, showing unseasonably mild weather and pre-Easter shopping may have pulled consumers to stores the prior month.
The 0.1 percent gain followed a 0.7 percent increase in March, Commerce Department figures showed today in Washington. Economists projected an advance of 0.1 percent, according to the median forecast in a Bloomberg News survey.
Categories like building materials, clothing and department stores dropped in April as the weather-induced gains of the first three months of 2012, the warmest on record, faded. Weaker employment growth will probably also make it more difficult for households to match last quarter’s pace of spending, which was the fastest in more than a year.
“The consumer is holding up,” said Neil Dutta , an economist at Bank of America Corp. in New York who correctly forecast the sales gain. “The key thing here is to determine to what extent the weather had an effect, and it’s pretty clear if you look at the components there was some weather impact.”
The cost of living was little changed in April as fuel prices dropped, and manufacturing in the New York region expanded this month at a faster pace than projected, other reports showed.
There is a very old saying in the stock market that goes “Sell in May, and Go Away.” This pertains to the notion that investors should cash in on their investments this month and take the summer off because June, July, August and September have traditionally been some of the worst months in the equity market.
Over the past decade, this adage has held true. If you were to sell the S&P 500 at the end of May, you would have avoided an loss over the past 10 years. For the EUR/USD however you would have lost out on a gain but selling USD/JPY in May would have been a great idea because the currency pair fell steeply between June and September.
Looking beneath the hood however, the decision to sell in May and go away for the summer is not so easy for currency traders because if you did so in 2009 and 2010, you would have missed out on big gains in the EUR/USD. Between June and September of 2009, the EUR/USD appreciated more than 3 percent and in 2010 it rose nearly 11 percent.
This year, there is a reasonable chance that stocks could continue to fall, leading to more risk aversion in currencies because US data has been mixed and central banks are returning to easier monetary policies. However following seasonality without following stories blindly would be a big mistake.
Euro rallies met with very solid offers above 1.2800
- Risk correlated assets back under pressure in European session
- Fitch downgrades Japan ratings; Yen sells off
- OECD and IMF out with some downbeat global comments
- UKÂ inflationÂ softer than expected
Early rally attempts in risk correlated assets on Tuesday were met with solid resistance in the European session. Market participants shrugged off upbeat news that Germany and France would make strong efforts to keep Greece in the EMU, and the reports that Greek banks would receive a Eur18B recapitalization down payment on Friday. Instead, focus remained on a Fitch downgrade to Japan, and downgraded Chinese growth forecasts from the OECD.
Relative performance versus the USD Tuesday (as of 10:45GMT)
The IMF also came out with some downbeat comments, adding to an intense intraday pullback in the Euro from levels above 1.2800 down into the mid-1.2700âs. From here, it will be interesting to see how things play out into North American trade, but with US equity futures already pointing lower, things are not looking pretty. Still, market conditions are quite choppy right now and we continue to recommend staying on the sidelines.
EUR/USD:Â The market remains under intense pressure and the focus for now is squarely on a retest of the 2012 lows from January at 1.2625. While we would not rule out a possibility of a test of this level over the coming sessions, short-term technical studies are correcting from oversold and are showing a need for some form of a corrective bounce from where a fresh lower top is sought out. Ultimately however, any rallies should now be very well capped by previous support turned resistance at 1.3000 in favor of additional weakness over the medium-term that projects deeper setbacks into the lower 1.2000â²s.
USD/JPY:Â The market continues to consolidate around 80.00 and is in the process of looking for a medium-term higher low ahead of the next major upside extension back above the yearly highs at 84.20 and towards 90.00 further up. However, for the time being it remains in question whether the market will still head lower towards the 200-Day SMA by 78.50 before ultimately reversing higher. The key level to watch above comes in by 80.60, and a break and close above this level will officially alleviate downside pressures and suggest that a higher low has now been carved in the 79.00â²s.
GBP/USD: The market remains under intense pressure since breaking back below 1.6000 and setbacks could now extend towards next key support in he 1.5600 area over the coming sessions. Still, daily studies are now stretched and we would prefer looking to sell into rallies towards 1.6000 where a fresh lower top is sought out.
USD/CHF:Â Overall the structure remains highly constructive and we continue to project additional upside over the coming months back above parity. For now, the latest break and close above 0.9335 is expected to accelerate gains for a retest of the yearly highs by 0.9600, while any intraday pullbacks should be very well supported ahead of 0.9200. Ultimately, only back under 0.9000 would negate outlook and give reason for pause.