Carl Gutierrez, 09.08.09, 04:05 PM EDT
The U.S. dollar reached its lowest point against the euro this year due to a myriad of forces including rising global stocks and commodities prices, low interest rates, and investors diversifying out of Treasury debt and into other assets including U.S. stocks with the Dow Jones industrial average approaching 9500 in late afternoon trading.
Stocks in Asia and Europe saw big gains, and gold topped $1,000 an ounce. (See "Stocks, Commodities Rally After Long Weekend.") Oil also gained 4.9%, or $3.31, to $71.33, on the New York Mercantile Exchange, due in part to Goldman Sachs affirming its year-long outlook. By midday trading one euro traded for $1.45, meanwhile the Dollar Index, which tracks the greenback against a basket of currencies, fell to its lowest level since September of 2008.
"It isn't as if the fundamentals are better in Europe," said Jessica Hoversen, a foreign exchange and fixed income futures analyst at MF Global. "There are other factors outside of economic growth taking hold in the market."
Japan's special drawing rights holdings hit a record $18.5 billion, from $3 billion in July. SDRs are the currency of the International Monetary Fund and other international institutions. It's a basket of currencies composed of the dollar, euro, sterling and yen in a fixed weighting determined by the IMF and World Bank every five years.
One of the reasons cited for the rise is an increased in commitment in overseas aid, but Hoversen noted that to a certain degree it speaks to the general demand for the dollar, and that scares the market. "It doesn't necessarily mean diversification away from the dollar, but there is a heightened sensitivity about the topic," Hoversen said.
Currency investors have been obsessed with the prospect of central banks diversifying out of the dollar. (See "Spotlight On The Dollar.") The fixation has been fueled by meetings under the G20/G8 framework, as well as candid comments from some of the largest reserve managers, namely Russia and China. The prospects of a massive diversification are low though, at least in the short-term, because most of the alternatives, including using SDRs as a global reverse currency are unrealistic.
The three-month London Interbank Offer Rate, commonly known as the Libor, which reached a record low of 30 basis points and that also contributed to the dollar's slide. "It makes the dollar the cheapest interest rate differential in the G10 on a Libor basis," Hoversen said.
The dollar's fall follows a United Nations report released Monday calling for a reduced role of the dollar as the world's primary reserve currency.
"This is not the first time the U.N. has called for this, but it's the most recent," Hoversen said. The report, which was produced by the U.N. conference on Trade and Development, stated that a viable solution to the exchange-rate problem would be a system of managed flexible exchange rates targeting a rate that is consistent with a sustainable current-account position.
"What the U.N. may be trying to do is eliminate global dependence on the dollar," Hoversen said. "However, more details would be needed on the mechanism for adjustment to judge how it would affect the global currency markets."
To be sure, the U.S. isn't solely responsible for the global imbalance. While the U.S. current account deficit is being funded by developing countries, the demand from developed countries is improving their living standards. Meanwhile, developing countries have kept their currencies low in order to stimulate economic growth via their export market, and ultimately change will be required on both sides. (See "Decouple Or Die.")
Hoversen also pointed out that curves of the overnight index swaps have Norway and Australia pricing interest rate hikes first. "They gain on the idea the global economy is going to recover," Hoversen said. "Their central banks have also been more hawkish than other banks." Commodity-based economies will be on the ground floor of supplying the increased demand. Moreover, Australia and New Zealand will be greater beneficiaries of the Chinese stimulus than other commodity currencies. G20 members also promised to keep fiscal and monetary stimulus running on full cylinders, suggesting an increased amount of risk, Hoversen said.