deep-red greenback

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With rates already very low, one of the main policy tools left for the Fed is USD devaluation.  Bernanke would never say that the objective of policy was to weaken the USD, however there is no doubt that this is one of the main channels through which the policy works.

A scan across some of the major currency and metals markets suggests that the anticipation of QE3 had been working to lower the foreign exchange value of the USD – and that the policy’s announcement has accelerated the move.

The most important cross is the EURUSD cross, and the USD has weakened against the EUR by ~8% since the 25 July low of 1.21. I would say that QE3 came into focus on 1 August, when the Fed used their post-meeting statement to tell us they were going to ease at the next meeting, however it was mixed with an ECB effect until the ECB meeting on 6 Sept. Since 6 September the USD is ~4% weaker against the EUR.

Looking at this cross only it’s hard to be sure how much of this is QE3 and how much is the ECB’s OMT plan – however the concurrent weakening of the USD against a broader variety of crosses suggests to me that at least the last 4% is due to USD devaluation.

Over the same period (6 September to now), the weakening of the USD against the JPY has been ~0.7%. This seems trivially small, however the modesty of the move is due to the fact that the Japanese are resistant to further JPY appreciation. In the context of the Japanese desire to resist further JPY appreciation, it is in the similar timing and direction that I find evidence for my ‘all about the dollar’ hypothesis.

Over the same period (6 September to present), the AUD has appreciated by ~3.5%. This is despite a sharp decline in Australian export prices, and the RBA’s increasing concern (as expressed in their September post-meeting statement) about the level of the AUD. Again, we see a sharp move lower in the value USD, at around the same time as the other moves.

The Chilean Peso, in many respects, is similar to the AUD — a small open economy that’s a major commodity exporter. The USD weakened ~2.5% against the CLP between 6 September and 14 September. Same timing, same direction…

The moves in precious metals markets are similar in timing and direction, but a little larger in scale. The value of the USD relative to Gold has declined by ~5% since 6 September.

The move has been sharper in the less liquid precious metals. The USD has fallen by ~9% relative to Platinum, and by ~7.5% relative to Silver.


  1. – EUR/USD is still around the lowest point since GFC, this time around USD depreciation will not help nearly as much. It started from 1.20, the lowest point in many years.
    – These extreme moves on single news, where fundamentals haven’t changed much, are speculative classic “squeezes” of opposite positions, let’s wait a few weeks to see where they settle.
    – Will QE3 work or not? If it works USD will be stronger, not weaker.
    – And ….. do we really think the RBA can do anything to release upward pressure on AUD when all other central banks are actively trying to depreciate their currencies? The only way to depreciate the AUD is to get some real ugly economic data, from Australia or China. 25 bps cut will not achieve anything, like 100 bps cuts in the last year also did not move the AUD a bit.

    1. Funny how little the EURUSD has moved – despite all the bad news. The EUR has been trading 1.20 to 1.50 since 2005 — the only exception being a short trip to 1.60 in 2008.

  2. A very pedantic point.
    The dollar would dpreciate since it is a floating currency. Only a Government can devalue a curency which is fixed.

  3. QE3 will work the same way QE 2 worked – it will drain the private sector of savings (just like a tax) and slow the economy into the first quarter of 2013. 10-Y Bond yields wil fall to 1%, and the USD will strengthen as investor seek a safe haven.

    I agree with ssec on the AUD – so long as Aussie interest rates remaion above 1% (ie: offers spread) I can not see a substantially lower Aussie Battler.

  4. This is interesting..from the SMH today.
    “The Reserve Bank of Australia says the dollar is held by as many as 23 central banks from Brasilia to Moscow, documents showed.

    The central banks of Brazil, Russia, Germany, Hong Kong, South Korea, Poland, Sweden, and Switzerland are among 15 economies that hold the Australian currency, according to a spreadsheet created in July and other papers released today under a Freedom of Information Act request by Bloomberg News. Among the eight possible holders are Iceland, Indonesia, Jordan, Malaysia and Singapore, they showed”
    So the RBA remains idle and happy to export Aussie jobs as central banks around the world manipulate their currencies lower. But we shouldn’t do anything about the AUD because, you know, markets are efficient……etc etc

    1. “So the RBA remains idle and happy to export Aussie jobs ….”

      The current unemployment rate is 5.2% : among the lowest in the world.
      Salaries are among the highest in the world.
      And are growing at about 4% rate. Also among the fastest rate in the world.

      I agree all of this is not sustainable in the longer term with a high AUD, but let’s not put the cart before the horse…. :)

  5. From the RBA minutes today:

    “The Australian dollar had depreciated slightly over the past month, but remained close to its post-float high. Members discussed the possibility that the high level of the exchange rate was weighing more heavily on the economy than might be expected. Overall, despite the ongoing structural change, the unemployment rate had remained relatively low to date.”

    They are concerned about the high AUD… but can’t find any signs of its impact in the latest economic statistics. Looks like as soon as the employment rate starts climbing they’ll cut again. So far we only had a decrease in the participation rate. Now it’s almost like everyone (incl. the RBA) wants/expects/demands the unemployment rate to go up to match the general feeling.

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