USD: Correction after previous losses
EURCHF approaches 1.45 again
Yen remains strong
US dollar
The USD has regained some ground since the beginning of the year. A correction after the previous losses caused this development, even though the movement accelerated due to the upcoming interest rate decision by the ECB.
The indicators from both economies on both sides of the Atlantic confirmed the massive economic downturn. The difference is that the ECB still has a chance of responding with interest rate moves, while the US Fed no longer can.
However, one thing that the US Fed can do is to stimulate the economy by buying securities. The corresponding programme for securitized mortgage loans has already been started. Enlarging the programme to cover government bonds is being discussed and seems likely in the coming months, because the financing requirements of the public sector will explode. With the purchase of securities, additional liquidity is made available to the financial cycle and thus the number of US dollars in circulation is increased without any corresponding production in the real economy. This will lower the value of every single US dollar. If it will also push up inflation as measured by the Consumer Price Index depends on whether or not the additional funds end up in the business cycle or stay on bank accounts. Decisive for currency markets though will be the fact that the supply of US dollars will increase massively. Furthermore, the purchasing programme of the US central bank will keep US yield levels relatively low for now. Higher inflationary risks and rapidly rising government debt will thus not be offset by any corresponding higher interest premiums. Therefore, the USD will lose appeal and is expected to weaken.
Swiss franc
The franc has again appreciated against the euro. This might have several causes. First, interest rate cuts are over in Switzerland, whereas they are still to come in the Eurozone. Hence, if their extent is above the expectations of at least some market participants, this would weaken the euro.
Furthermore, growth expectations are sluggish for Switzerland, but they are even more so for the Eurozone. This means additional support for the Swiss currency.
Finally, the franc still has the properties of a safe-haven currency, strengthening during falls on the equity markets. This implies that a further strengthening of the franc cannot be ruled out, especially if market sentiment stays close to the current lows.
Japanese yen
The yen strengthened against the dollar. As the Fed lowered the rates, the interest rate differential against the USD narrowed on the whole, which could still have a weakening effect on the dollar. The November data for the economies has been as catastrophic for Japan as for the US; thus, the possible impact was limited. In contrast, the market expectations for the American economy might have deteriorated further than those for Japan’s, leading to a further weakening of the dollar.
Similarly to the Swiss franc, the yen appreciates in cases of downward movements on equity markets. This was seen at the beginning of this year and should remain true for some time to come. Hence, we think that a further strengthening of the yen is definitely possible, except in the case of an intervention by the Japanese government, which has already been requested by several Japanese businessmen.
