Currencies Trading All Over the Map - Wild Swings Confuse Investors, Hamper Trade
Arizona Coin Collector
http://www.washingtonpost.com/wp-dyn/content/article/2009/01/07/AR2009010703519.html?hpid=topnews
Washingtonpost
Currencies Trading All Over the Map
Wild Swings Confuse Investors, Hamper Trade
By Anthony Faiola
Washington Post Staff Writer
Thursday, January 8, 2009; Page D01
Currencies including the dollar and the euro have
entered a period of extreme volatility that is
hindering global commerce and adding further
uncertainty to a world economy facing its worst
downturn in decades.
Over the past several months, global exchange rates
have taken some of their wildest swings in years,
with a fresh bout of zigzags hitting an array of
currencies in both rich and poor countries in the
past few weeks. That has humbled some of the
strongest and most time-honored of coins, like the >>
British pound, while fortifying others, like the
Japanese yen.
Many currencies are shifting directions like a
sailboat in a storm, causing unpredictable shifts
in exchange rates that are further worsening the
outlook for global trade as they confront buyers
and sellers of internationally traded goods with
another ill besides slumping demand: rapidly
changing prices.
Over the past seven days alone, for instance, the
Australian dollar shed nearly 10 percent against
the Swiss franc. That means an Australian steel
company with a contract to sell beams to, say, a
Swiss construction company would be forced to take
a significant haircut on those sales. As a result
of the swings, exporters from Brazil to Baltimore
say they are pushing for shorter-term contracts
and boosting their purchases of foreign exchange
hedges.
"Honestly, we just don't know how to analyze these
currency markets properly right now," confessed
David Bloom, head of currency markets for HSBC in
London. "We're now in an unconventional world where
you're getting huge movements that are no longer
grounded in the conventional models. So currencies
are lurching this way and that, and it's creating
a huge uncertainty."
Judging the direction of foreign exchange rates has
always been more art than science, but it has
become particularly hard with the onset of the
global financial crisis.
When assessing the immediate future of the dollar,
for instance, analysts would typically take into
account a number of factors, including how low the
Federal Reserve is likely to set interest rates
and the overall health of the U.S. economy compared
with other nations. But with the Federal Reserve
slashing rates last month to almost zero -- where
analysts expect them to stay for some
time -- interest rates are no longer as useful a
gauge of the dollar's value. Additionally, with the
economies in Europe and Japan experiencing as bad
if not worse recessions than the one in the United
States, judging whose economy, and therefore whose
currency, is stronger is akin to reading tea leaves.
The dollar and the euro, particularly, are engaged
in a game of cat and mouse, with the dollar
spiraling sharply downward in mid-December before
staging a rally in recent weeks. Underscoring how
fast any trend can reverse these days, however, the
dollar yesterday fell from a three-week high against
the humbled euro, which climbed 0.9 percent, to $1.36.
And in a sign of just how edgy the markets have
become, the fall in the euro over the past three
weeks had led some pundits to rekindle old predictions
that the 10-year-old European currency may collapse.
That argument centers partly on the belief that calls
for independent monetary policy may grow in countries
like Italy and Ireland, where weak currencies helped
spur past economic recoveries. Most serious analysts
still dismiss that notion, largely because, they say,
euro membership right now is the only thing fending
off an even worse crisis of confidence in those
nations.
Ironically, the future of the euro is likely to be
in jeopardy only if it gets far stronger, something
that could lock the likes of Italy and Ireland into
long-term recessions and heighten calls in those
countries to jettison the euro. At the moment,
however, that seems unlikely. In fact, analysts say
the euro will probably weaken against the dollar in
the months ahead.
The dollar, analysts say, took its mid-December dive
as the Fed diluted its value with near-zero interest
rates and a vow to print as much money as it needs
to jump-start the economy and ease the credit crunch.
But it bounced back as analysts began to conclude
that a major new stimulus package by the Obama
administration, and the relative speed with which the
government has sought to boost the fortunes of U.S.
financial institutions, might help generate a recovery
in the United States faster than in Europe or Japan.
The euro has particularly been plagued by fears that
some major European countries, like Germany, are still
moving too slowly to cope with the crisis.
"We've had the worst of the bad news in the U.S.
already, but the news is going to get worse in Europe,"
said Adam Posen, deputy director of the Peterson
Institute for International Economics. "Plus, the Fed
has already cut rates to almost zero, but the European
Central Bank still has a ways to go before getting
there. As they are forced to lower rates, the euro is
going to be hit."
Analysts say the dollar could yet take a far steeper
and more dangerous fall if Obama's stimulus plan
fails to turn around the economy, creating a crisis
of confidence that might cause foreign investors to
yank hundreds of billions of dollars from U.S. shores.
That could cause a run on the dollar and force the
Fed to raise interest rates, deepening the U.S.
recession.
But for the moment, observers are predicting moderate
strength for the greenback. That would be good news
for the likes of Japan's Toyota and Germany's
Mercedes-Benz, which could sell their wares for less
in the United States. It would be bad news, however,
for U.S. exports, which were one of the rare bright
spots of the economy in 2008, when the weaker dollar
made everything from American planes to soy beans
more attractive overseas.
"These currency fluctuations, these swings, are a
businessman's nightmare," said Drew Greenblatt,
president of Marlin Steel Wire Products, a Baltimore
exporter of wire products. "We were on a very positive
trend last year with the dollar getting weaker; it
made our products look like a 50-percent-off sale.
But if the dollar continues to get stronger, it's
going to hurt us, and these are times when nobody
can afford that."
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