FX winners and losers

FX winners and losers

Emerging market currencies still look attractive, according to currency analysts,
but many of the majors may have already made their runs vs. the U.S. dollar.

The U.S. sub-prime mortgage credit crunch debacle will most likely go down as one the most important financial market themes from 2007 — and the full financial ramifications for many of the major lending institutions involved are still unknown.

That news drove financial-market volatility levels sky high, especially in mid-August and in November. Forex traders dumped carry trade positions as volatility peaked, but shifted back into these higher-risk trades when it decreased. Despite proclamations that the carry trade was dead, traders will most likely continue using the strategy in 2008, especially if volatility moves lower.

The U.S. dollar continued the bear trend that has dominated the currency since 2002. Action in the U.S. Dollar Index (DXY) was basically a oneway street in 2007, as that index hit an all-time low around 74.75 in November (Figure 1). Into year-end, however, some interest in buying the U.S. currency emerged.

The big winners in 2007




The Brazilian real (BRL) remained smoking hot in 2007, as bullish interest-rate differentials attracted carry trade money from around the globe (Figure 2). The real chalked up gains around 18.75 percent vs. the U.S. dollar (all data as of Dec. 19.)

The Canadian dollar (CAD) placed second in the currency appreciation contest last year, gaining nearly 16 percent vs. the U.S. dollar (Figure 3). The dollar- Canada pair (USD/CAD) dipped below parity (1.00) for the first time in decades — meaning the U.S. dollar was worth less than the Canadian dollar.

Third in the line-up was the Swedish Krona (SEK), which gained 11.75 percent vs. the greenback (Figure 4). The Australian dollar (AUD), bolstered bycarry trade action and strong global commodity demand, posted an 8.81-percent gain vs. the U.S. dollar.

The euro, which made new all-time highs last year and came within a penny of the historic $1.50 level in late November, came in fifth place with gains around 8.75 percent vs. the dollar.

For currency traders, of course, the most important question is whether any of these trends will continue, and which currencies will emerge as winners and losers in 2008.

The 2008 playing field

In speaking to a variety of forex market strategists, several key themes emerged.

Assessing global economic activity is the first step in understanding where key currency moves may lie in 2008. After posting global gross domestic product (GDP) growth around 4.5 percent in 2007, most economists are forecasting a global slowdown in 2008, with projections around 4.0 percent. Dislocations from the credit crunch are one factor behind the downsized global forecast for this year.

Economists, however, highlight the potential for an asymmetrical type of slowdown, with weakergrowth seen in the G4 (the U.S., Eurozone, UK, and Japan), while emerging markets continue to plough ahead.

David Wyss, chief economist at Standard & Poor’s, predicts growth in the U.S., Japan, and the Eurozone to be around 2 to 2.5 percent in 2008 vs. projected 10-percent GDP growth in China and 9.5 percent in India. Jay Bryson, global economist at Wachovia, notes that while slowerglobal growth is expected by most, 4.0 percent is still slightly above the 3.7-percent average of the last 35 years.

Bryson’s research team at Wachovia is not calling for a recession globally or in the U.S.

Nonetheless, “the risk over the next two quarters for the U.S. is not insignificant,” he says.

Economists say the first half of 2008 is crucial for the U.S. — a period when recessionary conditions could develop, although for now most are calling for a narrow miss of negativegrowth.

Emerging market stars

Almost uniformly, economists and currency strategists heap praise on several emerging-market countries. Despite the dislocations occurring in financial markets amid the credit crunch, emerging markets are holding their own.

“I do see some of the emerging market countries remaining steady vs. a decade ago, when they were the catalyst for a lot of global jitters,” says Charmaine Buskas, senior economic strategist at TD Securities.

“It would surprise me if a wave of crises [breaks out] across the developing world,” echoes Wachovia’s Bryson. “The fundamentals of these economies are stronger than they were 10 years ago. I do believe [emerging economies] can punch above their fighting weight in their contribution to world growth.”

Michael Woolfolk, senior currency strategist at Bank of New York Mellon, agrees. “2008 will be a good year for emerging markets via economic growth, foreign investment in their economies, and the strength of their respective currencies,” he says.

However, Woolfolk says this is contingent upon the Bank’s baseline scenario, which assumes the U.S. will not have a hard landing and that financial markets on a global basis will be orderly.

Watch the BRICs

Woolfolk points to the BRIC countries (Brazil, Russia, India, and China) as possible forex winners

in 2008.

“These four countries represent some of the fastest growth among emerging markets and have very strong exports,” he says.

Woolfolk forecasts roughly 5 percent appreciation in the Brazilian real, Russian ruble, and the Indian rupee vs. the U.S. dollar in 2008. He sees potential for a 10-percent gain in the Chinese

yuan this year.

Rate differentials are always key

Regarding the Brazilian real’s doubledigit gains in 2007, Enrique Alvarez, head of Latin American research at Ideaglobal, says it was basically an interest- rate play.

The Brazilian selic rate (the country’s central bank lending rate) currently stands at 11.25 percent and has a steady outlook. While the U.S. federal funds rate is currently at 4.25 percent, widespread expectations are for two or three 0.25-percent cuts over the next several quarters.

Alvarez expects global forex traders to continue playing the carry-trade interest- rate differential strategy in the first half of 2008, with a bullish edge predicted for several Latin American currencies. He points the real, the Columbian peso (with rates at 9.50 percent), and the Chilean peso (with rates at 6.00 percent and rising) as top contenders for the carry-trade strategy.

“A very big determinant is what the Fed does, and we suspect they will go lower,” he says. “[In early 2008], I think the thrust of momentum in investment will be in favor of these currencies. It looks like foreign investors will continue to view Brazil in particular positively. At least initially there will be some upside.”

Asia Currency strategists also point to Asian currencies as likely winners in 2008. “Asia looks quite good simply because they have very strong structural underpinnings and have gone to mostly current account surpluses,” TD Securities’ Buskas says.

Wachovia’s Bryson agrees the outlook is bright for Asian currencies.

“The governments have an interest in having their currencies appreciate,” he says. “Economic fundamentals and politics point in that direction.”

Asian currencies also are poised to benefit from an unsteady dollar.

“There is the expectation the dollar will remain broadly weak, and the Asian currencies will bear the burden of adjustment,” Buskas says. She says “top tier” Asian currencies, from countries such as Japan, Malaysia, and Thailand, are those likely to see the most upward adjustment.


The majors

Noticeably absent from the potential winners list are any of the major currencies. Buskas sees limited upside potential for currencies such as the Canadian dollar, British pound, and euro.

“These currencies have had their rallies,” she says. “They’ve had their day in the sun.”

Nonetheless, there has been quite a bit of market chatter about the potential for a major reversal in the U.S. dollar during 2008.

Is the dollar bear being tamed?

“The big theme of the year could be the reversal of the U.S. dollar cycle,” says Vassili Serebriakov, senior analyst at 4Cast Inc. “The dollar has been in decline since 2002 and we could see a big reversal in that trend.”

Standard & Poor’s Wyss is forecasting three more quarter-point cuts in the fed funds rate, with a bottom at 3.50 percent in mid-2008.

“That means the dollar will continue to decline until the Fed stops loosening or the ECB starts loosening,” he says.

Wyss and others expect the European Central Bank to pull the trigger on a rate cut possibly in June, with another potential rate cut towards the end of the third quarter. The European
repo rate currently stands at 4.00 percent.

In the early part of 2008, most strategists expect continued U.S. dollar softness as the weak economic picture unfolds, with potential for a reversal around mid-year.

“This time last year we were thinking the downturn in housing would be shallow,” Buskas says. But there’s still a long way to go for the U.S. before it gets back on its feet.” Nonetheless, some argue the bear is, perhaps, being tamed.

“I think the major move in terms of the dollar has already happened,” says Kathleen Stephansen, director of global economic research at Credit Suisse. “I don’t think we will see that same type of weakness. The rate of depreciation will be slower.”



A euro top




Several strategists forecast near- to medium-term strength in the euro/dollar pair to around 1.55, with the euro stalling and reversing around that level (Figure 5).

Serebriakov forecasts a three-month target of 1.55, a six-month target of 1.50, and a 12-month target of 1.40.

Jamie Coleman, managing editor at Thomson FXHub.com, was much more optimistic on the prospects for the greenback in early 2008.

“I think we will see a reversal of what we saw in 2007,” he says. “The sub-prime crisis/credit crunch will ultimately impact Europe more severely than the market realizes now. If you look at their housing situation, there is anecdotal evidence there are more new houses for sale in Spain than there are in the U.S. There are 40 million Spaniards and 300 million Americans.

“I think the dollar will do better. It is no longer a one-way street. I think the dollar will be one of
the biggest winners as we see a big reversal of the weak dollar trend, which will come primarily vs. the euro and British pound. The fear of wholesale liquidation of the dollar has all but died.”

Coleman forecasts a dollar-bullish 1.37 euro/dollar price at the end of first quarter.

“We’ve been tested and we’ve seen the worst,” he says.



The pound




Many currency watchers have turned sour on the prospects for the British pound in the wake of the sterling’s historic rally above the $2.00 mark in 2007. The last quarter of 2007 was disastrous for the pound, as the currency fell precipitously vs. the greenback (Figure 6).

But many say the sell-off is just beginning, arguing the UK economy is very exposed to global housing and credit stress and the potential exists for rate cuts from the Bank of England.

Brian Dolan, chief currency strategist at Forex.com, says the pound is one of this year’s potential big losers.

“They are facing a housing bubble,” he says. “The strength from the UK economy over the last decade has come from the financial sector and the housing sector. Now, both sectors are under pressure.”

Dolan sees the pound continuing to retreat toward 1.90-1.80 in the year ahead.


Many ifs remain

“There is a lot that depends on global themes and how fast the credit market returns to normal,” 4Cast’s Serebriakov says. “That is the biggest risk going forward, and I don’t think anyone can give you a confident estimate of when that will happen.”

Forex.com’s Dolan adds, “this is definitely one of the most uncertain environments at the start of a year that we’ve seen in many years, and that makes long-term forecasting very difficult.”



BY CURRENCY TRADER STAFF

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• Outlook 2008: Avoiding the "R" word
  
• Fistful of Dollar, a bundle of contradiction
  
• Dollar Fate: Dustbin of History or Cynical Recovery?
• Riding The Yet Roller Coster

Outlook 2008: Avoiding the “R” word

Outlook 2008: Avoiding the “R” word
The U.S. economy is throwing off plenty of negative signs, and the dollar is under water. But solid GDP growth and an export boom have the potential to offset the negatives in the coming year.

As the end of 2007 approaches, the U.S. dollar index is near its all-time low, U.S. stock indices are well off this year’s highs, and the ongoing sub-prime mortgage implosion continues to undermine financial market confidence.

Heading into 2008, there are growing whispers about the possibility of recession in the U.S. A retrenchment in consumer spending in the wake of the continuing housing recession poses one of the biggest risks to the economy. Throw in crude oil near $100 per barrel and the potential for slower global growth and things indeed begin to look worrisome.

Despite these dangers, however, there are some bright spots for the U.S. economy, with exports leading the way. For now, most economists seem to believe the threat of recession will remain simply that — just a threat.

Recent economic data
Let’s take a look at some of the recent numbers. First, preliminary third-quarter U.S. gross domestic product (GDP) growth of 3.9 percent hardly looks recessionary.

The standard rule of thumb for defining a recession is two consecutive quarters of negative GDP growth. Of course, there is some wiggle room in that definition, and in the U.S., the privilege of labeling an economic downturn a recession has fallen onto the shoulders of the National Bureau of Economic Research (NBER) http://www.nber.org.

The third-quarter GDP data follows a second-quarter reading of 3.8 percent and a first quarter reading of 0.6 percent. However, the International Monetary Fund recently downgraded its U.S. GDP forecasts for both 2007 and 2008, cutting this year’s overall forecast to 1.9 percent and predicting 2008’s final number to be 1.9 percent as well.

Paul Kasriel, director of economic research at Northern Trust Company, is forecasting 1.7-percent GDP growth from the fourth quarter of 2007 to the fourth quarter of 2008.

“But the risk is to the downside,” he says.
Kasriel is one of the economists who believe the U.S. economy faces a number of critical risks ahead. Consumer spending, which represents about two-thirds of the overall economy, is one of the main engines of growth in the U.S. It is also precisely where Kasriel sees problems.

“There is a very definite potential for recession,” Kasriel says. “We are starting to see the housing recession spreading to the consumer-spending sector. Also, in 2008 I think state and local government spending will be restrained because of lower tax revenues.”

However, Diane Swonk, chief economist at Mesirow Financial, has a much more upbeat outlook.

“After a slow start and a slow end to 2007, I think we will see a reacceleration of growth in the second quarter of 2008,” she says. “That is when the effect of recent Fed easing will kick in.”

Swonk is forecasting overall 2008 GDP growth around 2.5-2.75 percent. She does, however, see a drop in the fourth quarter of 2007 to 1.5 percent.

The end of the home ATM
Probably nothing is hanging heavier over the economy than the far-flung repercussions of the sub-prime mortgage crisis and the developing housing recession. In the Nov. 5 New York Times article, “Homeowners Feel the Pinch of Lost Equity,” Peter Goodman wrote: “From 2004 through 2006, Americans pulled about $840 billion a year out of residential real estate, via sales, home equity lines of credit and refirefinanced mortgages, according to data presented in an updated working paper by James Kennedy, an economist, and Alan Greenspan, the former Federal Reserve chairman.

“These so-called home equity withdrawals financed as much as $310 billion a year in personal consumption from 2004 to 2006, according to the data. But in the first half of this year, equity withdrawals were down 15 percent nationally compared with the average for the last three years, and consumption supported by such funds plunged nearly onefourth, according to the Kennedy and Greenspan data.”

U.S. home sales dropped 8.0 percent in September to an annualized rate of 5.04 million units — the lowest pace since the National Association of Realtors (NAR) began tracking this data in 1999, the NAR says. The September decline followed a 4.7-percent drop in August, a 0.2-percent fall in July, and a 3.7 percent decline in June. Also, in September, the most recent data available, home prices fell 4.2 percent, while the month supply (inventory) rose to 10.5 months.

New home sales in September jumped 4.8 percent following a 7.9-percent decline in August. However, housing starts plunged 10.2 percent in September to 1.19 million units — a 43-percent decline from the recent high in 2005, according to the NAR.

Consumer confidence has definitely taken a hit in the wake of the decline in residential real estate sales. The preliminary November Michigan sentiment survey revealed a sharp drop in sentiment from 80.9 in October to 75.0 in November. Higher energy prices, a weak housing market, and overall concerns about the U.S. economy were blamed for the decline.

Two-tier economy?
One problem with the current situation might be the disconnect many people see between some of the economic numbers vs. their personal experience.

“We continue to get numbers that make the economy look better on paper than it feels to a lot of people,” Swonk says. “Higher energy prices and the weakness in housing disproportionately hits middle and lower-income people. Even though the economy will technically skirt a recession,
it may not feel like it to a whole sector of people.”

Despite her relatively optimistic outlook, Swonk sees consumer spending slowing from a 3.0-percent pace in 2007 to a 2.25-percent pace in 2008.

“Consumer spending is moving forward, but it sure doesn’t feel like it,” she says.

The sunny side of the economic street
While the U.S. dollar has been dropping like a brick vs. the euro and the British pound (Figure 1), it has had a positive impact on one sector of the economy — exports. Tim Rogers, chief economist at Briefing.com, calls recent export data, including third-quarter exports totaling $1.4 trillion, “fairly astounding.”

According to the September 2007 figures, imports totaled $197 billion while exports came in at $140 billion — still lower than imports but up about 14 percent year-over-year, according to Rogers.

“The weak dollar helps drive things,” he says.
This phenomenon has helped trim the mammoth U.S. trade deficit, which Rogers says has fallen about 18 percent from its all-time high of $69 billion in August 2006. Swonk also sees continuing improvement in U.S. exports, with an 8.4-percent increase in 2008.

“It is a very robust export picture, with the dollar giving a tailwind to market-share gains,” she says. A related boon to the economy courtesy of a weak dollar is increased foreign tourist spending.

“When you can buy Prada cheaper in New York than in Paris, it makes Madison Avenue look like a flea market to Europeans,” Swonk says.

Ken Goldstein, economist at the Conference Board, believes the U.S. will sidestep recession next year, partly because of the export boom. He is also optimistic the housing sector is nearing a bottom. Lastly, Goldstein addresses the pivotal role of the consumer.

“Two-thirds of the economy is growing by 2.0 percent,” he says. “The consumer is slow, but not stalling out.”

Still some clouds on the horizon Despite some optimism regarding 2008’s economic prospects, economists admit there are still a number of black clouds darkening the horizon. First and foremost is crude oil near $100 per barrel, which has potential inflationary implications throughout the entire economy.

“It is not just that price, but at what price do we see a gallon of milk go up because of gas?” Goldstein says. “How much more does it cost to get the milk from the dairy farm to the grocery store? And it’s not just milk. It’s stretching household budgets — there’s a chance it might tip the consumer.”

The weaker dollar itself is also inflationary because it increases the price of imported goods. While the lower greenback supports the export picture, “the second shoe on the dollar is yet to drop,” Swonk says, pointing to “the full impact of the oil price increases and the full effects of the
inflationary consequences.”

Another black cloud hovering on the horizon is continuing fallout from the sub-prime mortgage mess, which has proven to be more far-reaching on Wall Street than most people initially dared to imagine.

“There is uncertainty as to where the dust will settle with the sub-prime debacle,” Swonk says. “The process will take another three to six months to get some stability and will leave the dollar vulnerable.”


BY CURRENCY TRADER STAFF

More :

• Fistful of Dollar, a bundle of contradiction
  
• Dollar Fate: Dustbin of History or Cynical Recovery?
• Riding The Yet Roller Coster
  

A fistful of dollars, a bundle of contradictions

A fistful of dollars, a bundle of contradictions
Where there’s risk, there’s opportunity. The dollar’s depressed level may itself hold the key to its eventual recovery.

The dollar slide seems never-ending. The forex market is in the grip of two intolerable contradictions, and unless a resolution emerges — a new way of thinking about things — the prudent bet is on continuation of the slide.

Contradiction No. 1

Aside from one good year in 2005, the euro has been cleaning the dollar’s clock since bottoming in 2001 just under 84 cents (Figure 1). The price of crude oil is shown on the same chart to highlight the degree of correlation that has developed between these markets in the past five years.

At a late-November OPEC meeting in Saudi Arabia, Iran and Venezuela pushed for moving away from pricing oil in dollars. Iranian President Mahmoud Ahmadinejad said the falling dollar means oil producers are, in effect, subsidizing the U.S.

“They get our oil and give us a worthless piece of paper,” he said. “We all know that the U.S. dollar has no economic value.”

Iran already prices oil in euros but has to accept the world oil price is first set in dollars, so it’s an empty change. For his part, Venezuelan President Hugo Chavez called for a “revolutionary OPEC” that embodies a socialistic/ populist political stance.

These two leaders — OPEC’s own little lunatic fringe — are not among the world’s most respected, but the uncomfortable fact remains the dollar is, to a fairly large extent, a hostage to the price of oil. Other countries are equally dependent on imported oil, though, and while Europe may be getting a break because of the Euro’s strength, it’s not a get-outof- jail-free card. Since the end of 2005, the price of oil has risen 56 percent in dollar terms ($61 to $95) while the euro has gained only 24 percent (1.1844 to 1.4631).

The price of oil is not a single cause of inflation in any economy — most economists still think an increase in money supply is necessary to feed inflation — but it is a worrisome contributing factor. But because of the credit crunch, which has many more months to run, the bond market thinks the probability of a Fed rate cut at the Dec. 11 Federal Open Market Committee (FOMC) meeting is 90 percent. This means, unless the yield curve steepens substantially, the market is pricing in a humdinger of a recession, probably in the form of stagflation — drastically slower growth (such as 1 percent vs. the natural rate of 3.5 percent in the U.S.) accompanied by dramatically higher infla-tion (such as 5 percent compared to the Fed’s desired 2 percent or under). In a normal scenario, a recession would reduce activity and thus the demand for oil. And
since the world is not really decoupled from the U.S., demand should fall elsewhere, too.

The market is in the grip of an intolerable inconsistency. It sees inflation rising — a lot — hence the near-doubling of the 2-year/10- year yield spread to 0.825 percent since Sept. 17 (before the Fed started cutting rates). The yield on the 10-year T-note just before Thanksgiving was 4.15 percent, well under the Fed funds rate of 4.5 percent. It’s never a good thing when the 10-year is yielding less than the overnight rate; it means the market is certain recession is coming. Therefore, the Fed should cut rates to boost growth.

At the same time, however, the market finds the Fed’s embrace of the core Personal Consumption Expenditures (PCE) price index unacceptable because everyone is pretty sure consumer behavior is predicated on disposable income, which is affected by the headline.Consumer Price Index (CPI), including oil and food.

At last count, the headline CPI is up 3.5 percent, but in practice consumers know it’s up a lot more for some items, such as heating oil. But the bond market believes the Fed will cut rates again at its Dec. 11 meeting. How can the Fed cut rates if inflation is rising? Doesn’t this value growth more than inflation?

Another rate cut means the Fed is honestly afraid of recession. It’s what Mr. Greenspan would do. But this is the Bernanke Fed. Does he have the salt to stand pat, as suggested in the last Fed statement (“the risks are roughly balanced”)? A Fed rate cut in December would be a big blow to Mr. Bernanke’s inflation-fighting credentials.

We can’t have it both ways — denying the existence of rising inflation and pretending rate cuts will not boost it further. A rate cut removes whatever remaining yield advantage the dollar has over the euro — the yield spread between the U.S. 10-year note and the German Bund (the equivalent 10-year German treasury note) has already been pared to a mere 10 basis points from more than 200 basis points only two years ago. The loss of yield advantage is severely dollar-negative and, if the euro-dollar-oil connection is valid, it implies even higher oil prices, which in turn feeds inflation (or the perception of impending inflation), and so on. It becomes a vicious circle, which is why periods of stagflation need an external shock to be broken.

These shocks can take the form of a war, a tax cut, government pump-priming, or something from left field we can’t imagine yet — like a meltdown in an emerging market stock market that sends funds fleeing to the safe-haven dollar. Figure 2 shows the Shanghai Composite Stock Index, which has increased roughly six fold, from 1,000 to 6,000.

This brings us to the second contradiction



Contradiction No. 2.
“Investments” such as metals and emerging-market equities remain more attractive than dollar-denominated securities, and it will take a crash of titanic proportions to redirect money back to developed markets in general and the U.S. in particular.

Consider that the return on U.S. equity investment from 1989 to today is 10 percent, while it’s 12 percent in emerging markets — and in some cases, such as China, a gain of nearly 600 percent. Japan has been the major loser in all this, going from a 40-percent share of global market cap in 1989 to 13 percent in 1997 and 9 percent today. Emerging markets had one percent of global market share in 1989, seven percent in 1997, and 11 percent today.

From 1989 to the present, the return on Japanese equities has been -2 percent. But where the outgoing investment flow from Japan used to head directly to the U.S. or Western Europe, today it is increasingly going to emerging markets, especially China.

The market is in the grip of another unbearable contradiction. It wants to flee the dollar — for euros, for Chinese stocks, for speculative positions in metals and oil — but it has to keep returning to the dollar every time a scary piece of news comes out. After every incident, however, the dollar is a little lower than it was before, getting no lasting support from hot-money inflows.

If you have been trading forex since August, you know the drill: Some bad news emerges about credit markets, oil inches another notch toward $100, or the stock market wobbles, and risk aversion gets a grip on panicky traders. They dump high-risk securities and high-risk trades, which in the forex market means carry trades such as Australian dollar/ yen, British pound/yen, and euro/yen.

as investors flee to safe-haven U.S. government paper. But this is a fleeting thing — as investors buy U.S. government bills and notes, they drive the yield down (hence the aforementioned tightening of the bond-Bund yield spread).

Then things calm down for a day or two and risk appetite, which until recently was called “greed,” pokes its head out again. Carry trades are re-established, the yen falls against everything, and traders are free to bash the dollar. On several occasions, sentiment flip-flopped in a single day, or every two or three days. Trading has been horrible for more than three months now. Sometimes it seems as if the only way to make a buck is by sheer luck — by guessing, for example, that the price of oil would take a breather short of $100. The seeming correlation among equity indices, oil, or gold and currencies is confusing and can be explained only by the unifying factor of risk aversion.

The question on everyone’s mind is whether the summer credit crisis was the tipping point that shifted securities markets into another gear. The answer is likely yes. The new gear is higher and it’s moving money around faster. Who would have imagined that carry trades would be put on and taken off in a few days, let alone hours? Carry traders used to be far more staid and cautious; you could calculate breakevens over the course of months. Now our heads are spinning from daily and weekly reversals in currencies such as the Canadian dollar and Australian dollar, whose fates are now divorced from central bank management and economic performance.

The threat to the U.S. dollar takes two forms — reserve diversification and hot-money flows. Reserve diversification has been around for a while, although it was a little unsettling for the Gulf Cooperation Council, which includes Saudi Arabia, the United Arab Emirates, and Qatar, to announce it will study the dollar and consider advising a change to their currencies’ fixed rates against the dollar. A summit will take place in Doha, Qatar Dec. 3 and 4.

Let’s assume various countries continue to embrace diversification away from the dollar. This is certainly what the market is expecting and it’s even beginning to be taken in stride. It’s a core assumption now, not a shock. The chief consequence is to make the U.S. current account deficit appear harder to fund. But long-term portfolio inflows don’t fund trade; bank and supplier credits fund trade. The shocking long-term capital outflow in August, which was a function of managers liquidating to get their hands on cash at the height of the credit crunch, was only partly reversed in September.

The most recent Treasury International Capital System (TICS) report was only a little positive. The net long-term portfolio inflow rebounded in September to $26.4 billion from an outflow of $70.6 billion (revised) in August. However, the “Total TICS” number, which includes bank deposits and short-term paper, was negative: -$14.7 billion from - $150.7 billion (revised) in August when it is usually a big inflow, as it was in July ($83.5 billion). Foreigners bought $26.3 billion in U.S. Treasury bonds, $11.5 billion in U.S. agency bonds, $15.1 billion in corporate bonds, and a feeble $2.5 billion in U.S. equities. This is better than the giant sale of $40.7 billion in U.S. equities in August. (Meanwhile, U.S. investors bought $9.2 billion in foreign equities and $19.7 billion in foreign fixed income.)

We can rationalize this was an ongoing need for liquidity and doesn’t necessarily reflect a loss of confidence in the U.S. economy. It must be acknowledged, however, that flows into and out of U.S. paper (even plain, old checking accounts) can be red-hot in today’s electronic world.

Hot money is dangerous. We saw what it did in Thailand and other emerging markets in the 1997-98 crisis. The only real antidote to hot money flows is: 1) restored confidence based on hard evidence and 2) capital controls.

It’s difficult to see where hard evidence of structural integrity and excellence is going to come from when the U.S. trade deficit is more than 5 percent of GDP and U.S. debt is an unknown number (there are so many conflicting reports). Nobel Laureate Joseph Stiglitz, author of Making Globalization Work, recently estimated the Iraq war alone has cost about $2 trillion so far (in an economy of $13 trillion). Stiglitz also says from an economic perspective, Bush is the worst president since Herbert Hoover, which is not unrelated to the pickle the country is now in.

Here’s the contradiction: The U.S. has the world’s biggest economy, the most liquid and transparent financial markets, and is the world’s sole military superpower, but to fund its operations it depends utterly on foreigners to buy its private and public debt while at the same time it acquiesces in the devaluation of the currency. As have all of Mr. Bush’s treasury secretaries, current secretary Henry Paulson continues to repeat “let the market decide.”

To be fair, the government can’t meddle in the Fed’s decision-making, and it would discover outright intervention distasteful and contrary to free market principles (as well as making the U.S. look desperate, which generally only makes things worse). But as with inflation and interest rates, you can’t have it both ways. Something’s got to give. You can’t be the world leader and continue running twin deficits that depend on the kindness of strangers — while offering those strangers less of a return than they can get elsewhere.

This is why tension is so high, markets are so choppy, and the dollar is melting like the polar ice caps — a little faster all the time and in a self-perpetuating way. Although we may yet get a sizeable correction that turns the euro away from 1.50 for a while, forecasts of 1.6500 and 1.75 no longer seem off-the-wall.

At some point, the dollar will become so cheap that direct investments — factories, shopping centers,and real estate of all descriptions (foreigners are already flooding New York City and housing prices there are rising, not falling) — will become deliciously desirable.

Direct investment saved the dollar in the late 1990s, and it can do it again. But the allure of the U.S. has been eclipsed by the glamour of Shanghai and Mumbai. It’s just a place to park some capital safely until the next new thing comes along. This is a very bad spot for the U.S.

The solution? Incentives for foreigners to make direct investments. After the U.S. repulsed Dubai Ports and a Chinese attempt to purchase a U.S. oil company, it’s not going to be easy to write a convincing invitation. But from a policy perspective, it’s the only dollar rescue plan imaginable today.

BY BARBARA ROCKEFELLER

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The dollar’s fate: Dustbin of history or cyclical recovery?

The dollar’s fate:
Dustbin of history or cyclical recovery?


Contrary to what you’ve heard, the dollar’s slide isn’t a big threat to the economy. And the downtrend is getting long in the tooth, anyway.

Here’s a sampling of the news stories that helped deal the U.S. dollar a body blow in early November:

• Hedge-fund manager Jim Rogers announced he was selling all his dollars, buying yuan, and moving to China.
• An official in China’s National People’s Congress said China would diversify reserves out of weak currencies and into strong ones.
• Iran and Venezuela proposed OPEC should price oil in currencies other than the dollar.
• And last but not least, Brazil’s super-model Gisele Bundchen reportedly demanded compensation in euros rather than dollars.

The euro (EUR) rose to new record highs against the dollar, drawing a bead on the $1.50 mark (Figure 1). The British pound (GBP) and the Australian dollar (AUD) were at levels not seen in more than two decades (Figure 2). Even the low-yielding Japanese yen and Swiss franc participated in the move against the once Almighty Dollar.

On Oct. 1, former Federal Reserve Chairman Alan Greenspan commented on the end of the dollar’s dominance, noting the dollar’s status as the pre-eminent reserve currency eroding as the euro and British pound become more attractive. The dollar has been trending lower for the last five to seven years while the euro has risen since fall 2000, when the major central banks intervened in the foreign exchange market to support it. More than one economist has commented the dollar is in trouble. But is it really?

The weakness of the dollar has transcended finance and entered popular culture. Everyone has an opinion — reminiscent of the late 1990s when cab drivers would offer Internet stock tips. This saturation would seem to imply a mature phase of market development.

Rogers’ stated intention to sell all his dollars and buy yuan is a clear example of the “irrational exuberance” of the dollar bears. His calculations attribute no value to political liberties — while the U.S. will allow Rogers to take his money out, Chinese authorities would likely be less accommodating if he changed his mind.

On Nov. 7, Cheng Siwei, vice chairman of the Standing Committee of the National People’s Congress, said, “We will favor stronger currencies over weaker ones, and will adjust accordingly.” This suggests China is going to diversify its approximately $1.4 trillion reserve holdings away from the U.S. dollar. But what incentive does China have, even if that is its intention? In reality, what China (and other central banks) might be doing is diversifying new

reserve accumulations, not its stock of reserve holdings.

The facts contradict the story
The most authoritative sources of reserve currency allocation are the International Monetary Fund (IMF) and the Bank for International Settlements (BIS). Their most recent data covers the second quarter of 2006.

This data indicates at the end of 2006’s second quarter the dollar’s share of reserves slipped from 66.1 percent to 64.8 percent while the euro’s share rose from 24.8 percent to 25.6 percent. Together, the sterling and the yen made up only 7.5 percent. (Note: Not all countries report the
allocation of their reserves.) These modest figures seem to show only the slightest shift in reserve diversification. Why? Valuation. For example, suppose you are a central bank
with reserves evenly divided between dollars and euros. Over the past year the euro has risen almost 15 percent vs. the dollar. You are a patient central bank and have done nothing, but because of this valuation shift, the proportion (i.e., the net value) of your euro reserves has increased while the proportion of dollars has declined. This change in currency values gives the appearance of a greater shift away from dollars than is actually the case.

The data shows central banks that report their currency reserve compositions hold more dollars than ever before, but they also hold more euros than ever before — it’s not a zero-sum game. In fact, if there has been any trend in reserve diversification, it seems to be out of yen and into the
British pound.

In the past many economists have argued that central banks could be thought of as long-term countertrend speculators — that is, when the U.S. dollar is weak, central banks intervene and buy it. Siwei’s comment implies just the opposite — that the People’s Bank of China would be a
long-term trend speculator. The last central bank to reportedly engage in such practices was Bank Negara (Malaysia’s central bank) in the 1990s, which abandoned the strategy after suffering sufficient losses.

Also, the “dollar overhang,” or world’s dollar surplus, is not as large as often portrayed. True, although the U.S. economy comprises about one third of the world’s economy,the dollar makes up almost 65 percent of the currencyreserves. This discrepancy, however, is not a fair measure of the dollar overhang because the countries formally or informally tied to the U.S. economy — the “dollar-bloc,” if you will — comprise approximately two-thirds of the world economy. This figure is more in keeping with the dollar’sreserve percentage.

Interventionists send mixed messages While speaking in the U.S. in mid-November, French President Nicolas Sarkozy seemed to encourage the U.S. to intervene in the foreign exchange market to arrest the dollar’s slide.

Why should it? The dollar’s decline is not adversely impacting the U.S. economy. If anything, it’s helping to substitute foreign demand for slackening domestic demand. Imported prices, excluding fuels, aren’t rising any faster than domestic prices. Intervention might also confuse the message U.S. policy makers have been sending to China and other countries: Let the free market determine the value of the currencies. President Bush could be the first president not to intervene in the foreign exchange market since the end of Bretton Woods, and with the Federal Reserve still looking to cut rates, a weaker dollar is consistent with current U.S. monetary policy.

Fed study: Limited impact of a weaker dollar
One of the interesting elements in the dollar’s recent decline is that few, if any, people are suggesting it is being driven by its perennial nemesis, the large trade deficit. Most recognize the divergence of monetary policy and the anticipated trajectory of interest-rate differentials are the significant forces driving the greenback lower. However, many expect the weakening dollar will shrink the U.S. trade deficit. Such hopes are likely misplaced.

In “Why a Dollar Depreciation May not Close the U.S.Trade Deficit,” in the June issue of the New York Federal Reserve’s Current Issues in Economics and Finance, Fed economistsLinda Goldberg and Eleanor Wiske Dillion persuasively argued there are three mitigating factors that may limit the impact of the dollar’s decline on the U.S. trade imbalance.

First, because nearly all U.S. imports and exports (93 and 99 percent, respectively) are invoiced in dollars, a weaker dollar’s impact on import prices is less than it would otherwise (and for other countries) be. By comparison, since the advent of the euro, the Eurozone and the EU countries have reduced their use of the dollar as an invoicing currency for intra-European trade: 54 percent of Eurozone imports and 59 percent of their exports are invoiced in euros. In trade with the U.S., however, the dollar is still predominantly used. Studies also suggest a high percentage of traded goods in Asia, Latin America, and Australia are still invoiced in dollars.

In Japan, for example, only 26 percent of imports and 38 percent of exports are invoiced in yen. The share of exports invoiced in dollars often widely exceeds the share of exports accounted for by the U.S., which means many countries are using the dollar even when the U.S. is not one of the trade partners.

Second, the article notes that foreign exporters’ long-term competitive strategies are aimed at preserving market share, which means they accept narrower profit margins by not passing through the costs of a weaker dollar to the U.S. The authors suggest this is largely a function of the large U.S. economy’s higher level of competitiveness. But there is another possible explanation. U.S. businesses (and Anglo-American economies in general) rely more on the markets, rather than banks, for capital. This means the cost of capital for Anglo-American companies rises if they do not meet the markets’ quarterly earnings expectations. This makes them keen to protect profit margins and more likely to pass along adverse currency movements.

In Continental Europe and Japan, by contrast, companies are more reliant on banks for capital, and banks tend to be more patient than the markets. The corporate expansion strategy that follows from this capital distribution model encourages companies to protect market share, which, in the short-run, may mean accepting a profit squeeze to maintain a longer-term strategic position.

The third factor the authors examined was the value added to imports after these goods enter U.S. ports — specifically, storage, transportation, and marketing costs. These costs, which account for 30 to 50 percent of the final price (a notably larger percentage than in most other countries) for a wide range of U.S. goods, are denominated in dollars. Even without the other mitigating factors, this reduces the portion of the final price that is impacted, even in the best of conditions, by the vagaries of the foreign exchange market. This means the U.S. experiences less
pass-through of currency movement to import prices than other countries. The authors cite a 1975-2003 study that analyzed the impact of currency movements on import prices with a year
lag. The average pass-through for OECD countries was estimated at 0.64 percent, which means a 1-percent change in currency prices generates an average 0.64-percent change in import prices, with a wide variance around the mean.

In the Eurozone, the pass-through is estimated at a little more than 0.8 percent. In Japan, estimates vary between 0.57 percent and 1.0 percent, with the rate usually at the upper end of that range. By contrast, the pass-through to import prices in the U.S. is estimated at 0.42 percent — and even this might exaggerate the pass-through in recent years. Since 1990, the degree of pass through has dropped to 0.32 percent in the U.S., which is well below the OECD average of 0.48 percent over the same period. The dollar’s decline has been largely concentrated
against a handful of major currencies. The Federal Reserve’s major currency trade-weighted index has fallen a little more than 11 percent since the beginning of last year, while its broader trade-weighted index has fallen by a more modest 8.5 percent. These indices give more weight to countries with which the U.S. trades more and less weight to countries with which the U.S. trades less. The broader the index, the more countries are included (which often means less-developed countries with currencies historically undervalued by purchasing-power-parity models).

These arguments suggest the improvement in the U.S. trade balance, which contributed almost 1.5 percentage points to both Q2 and Q3 2007 growth, is more likely a function of growth differentials than the dollar’s decline. And through the early part of Q4 2007 import prices were still rising at a slower rate than domestic prices.

Temporal rift
While we should be prepared for a weaker dollar in the near-term, the downtrend is getting a little long in the tooth as 2007 draws to a close. In terms of duration and magnitude, the downtrend does not seem exceptional, but market participants often underestimate cyclical influences and exaggerate structural influences.
Traders should not make this error with the dollar. Many foreign currencies, such as the euro, sterling, and Canadian dollars, are well beyond levels that reasonable valuation models would suggest are appropriate. As the late free-market economist Rudi Dornbusch taught us, an overshoot in the foreign exchange market is perfectly rational, but it is still an overshoot.

In the short-run, the U.S. dollar was punished for the Federal Reserve’s pro-growth policies of interest rate cuts. Depending on a number of imponderables, the other major economies may be four-nine months behind the U.S. easing policy, except perhaps the Japanese. The Bank of England and the Bank of Canada are the most likely candidates to follow the Fed, while, in contrast, the Reserve Bank of Australia and the Riksbank of Sweden might not be finished tightening yet.

Policy makers abroad will need to respond to several headwinds; many European countries already appeared to be losing economic momentum even before the credit crunch took hold. While the U.S. economy accelerated in Q2 and Q3, Europe slowed and Japan actually contracted in Q2, although it recovered somewhat in Q3. The tightening market conditions, the appreciation of the euro and the pound, and the rise in energy prices will take their toll. Individually, these challenges may not seem significant, but together they are likely to trigger a policy response. By that time the Federal Reserve will be done (or nearly done) tightening and the groundwork for the U.S. dollar’s cyclical recovery could begin.
A year from now, maybe we will be talking about “eurosclerosis” and America’s amazing ability to reinvent itself.

BY MARC CHANDLER

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• Riding The Yet Roller Coster

Riding the yen roller coaster

Riding the yen roller coaster
Equity market volatility and global risk appetites will drive the yen in the near future.

The start of the fourth quarter has been volatile for the Japanese yen (JPY). Japan’s currency swung up and down in the weeks following a change of the Japanese political guard with a new Prime Minister Sept. 26, a fresh plunge in U.S. equity prices in mid-October, and ongoing portfolio adjustments in relation to global carry trade positions (Figure 1).



Fresh concerns about the U.S. economy, centered around housing market woes, helped trigger the October equity sell-off (the 20th anniversary of the October 1987 crash might have played a part, too), which in turn decreased global investors’ appetite for risk — again — and helped drive the yen higher vs. the dollar. It’s like seeing reruns of your favorite television episode. When risk appetite in the global investment community rises, players move back into the carry trade, selling yen and buying riskier, highyielding assets. A decrease in risk appetite, however, sparks an unwinding these positions, which ultimately boosts the yen.

The risk roller coaster
With interest rates at 0.5 percent in Japan, the lowest among industrializednations, analysts say the carry trade is not dead — at least not yet, anyway.

Sluggish growth conditions in Japan, with hints that deflation is still lingering, will likely constrain the Bank of Japan (BOJ) from “normalizing” interest rates anytime soon. As a result, when global investors find a renewed appetite for risk, they’ll likely step back into the carry trade, depressing the yen’s value. However, at the first whiff of volatility, financial market instability, or weakening economic news — especially relative to the U.S. — a massive unwinding would prompt the yen to spike up again.

“Carry trades remain extremely fluid,” says Brian Dolan, chief strategist at Forex.com, a division of Gain Capital. Dolan has noticed an extremely high correlation between U.S. stocks and the dollar/yen pair (USD/JPY). “If stocks are down, the yen crosses are down,” he says. Jamie Coleman, managing editor of Thomson FX Hub, agrees.

“Trading in the yen has almost nothing to do with the Japanese economy and everything to do with the carry trade and people’s willingness to take on risk,” he says. “The carry trade has become the risk barometer. When the market feels risk averse, the yen strengthens; when the market is in a risk-taking mood, it shorts yen aggressively.”



Political instability
Another factor is Japan’s political structure, which is so closely tied to its economy. A political shake-up at the helm of the Japanese government has injected uncertainty into the economic arena, including much-needed fiscal reforms. In mid-September Japanese Prime Minister Shinzo Abe of the Liberal Democratic Party (LDP) was forced to resign in the wake of his party’s devastating loss in upper house elections. However, the new Prime Minister, Yasuo Fukuda, has already lost popularity. A late-October poll by Mainichi Shimbun revealed public support for the new Prime Minister had dropped to only 46 percent, down 10 percentage points from the previous month, just after he hadassumed office.

“Fukuda will face the challenges that bedeviled his immediate predecessor — how to move the economy and growth forward, beat deflation, and curb the recent explosion in public debt, which has reached a point where it will represent a significant burden to future generations,” says Matt

Robinson, economist at Moody’s Economy.com in Sydney, Australia. ”Addressing the government’s budget deficits will require reining in public spending and also reforming the taxation system, including raising consumption taxes.”

Some analysts expressed concern the new Prime Minister may actually be a step backward for the country.

“I worry he is a member of the old school,” says Tony Hughes, managing director of credit risk at Moody’s Economy.com in Pennsylvania. “He has been a minister in LDP government and his father was also an LDP prime minister. There are all these symbolic ties to the old school.”

Japan is known for its extensive system of patronage and backroom deals, which analysts say have included many “bridges to nowhere” — porkbarrel spending designed give political allies lucrative, but unnecessary, public works and business ventures.

“There is a desperate need for reform,” says Hughes. “Japan is increasingly being run by old guys in suits who represent the old politics. I don’t feel confident the problems they encountered in the 80s and 90s will be overcome.”



The growth picture

Japan’s economic fundamentals aren’t especially encouraging. Many economists agree the Japanese economy continues to struggle. The International Monetary Fund (IMF) recently released new projections for global and individual country growth, with percent. Credit Suisse economists lowered their 2008 Japan GDP forecast from 2.3 percent to 1.8 percent. Moody’s Economy.com’s 2007 GDP growth is at 2.1 percent, slowing to 1.8 percent in 2008.

“The Japanese economy has returned to stagnation, with consumer spending and consumer sentiment taking a hit,” Dolan says.

Recent data reveals consumers continue to hold off on spending. Japanese department store sales fell 2.5 percent year-over-year in September, following a 1.4 percent year-over-year increase in August.

Deflation still alive

While economic growth is faltering, inflation remains nowhere in sight. The latest data revealed that yearover- year in August, the core CPI rate had actually declined by 0.1 percent.

“Essentially Japan is still experiencing deflation, and that’s preventing the BOJ from hiking rates,” says David Powell, senior analyst at Ideaglobal in New York. “Japan has not been able to

revive domestic demand very well. Incomes have not been rising along with the tightness in the job market, which constricts consumer spending and is the weakest link in the Japanese recovery.”

Looking to 2008, Moody’s Economy.com’s Robinson does not think inflation will emerge at any significant level.

“High crude oil, as well as higher food prices across Asia, will put upward pressure on consumer and producer prices in the months ahead, eventually feeding into core inflation measures,” he says. “The recent appreciation of the currency will counteract this, dampening any imported inflationary pressures, while the subdued state of the consumer sector will ensure that demand pressures remain too weak to put any real upward pressure on prices. Even if Japan can break from deflation, any rise will be small.”

Monetary policy

These factors add up to a BOJ firmly on hold. The overnight rate in Japan remains at 0.50 percent, the last adjustment a 0.25-percent basis-point hike in February.

The next meeting is Nov. 12-13 (the most recent one was Oct. 31, and rates remained unchanged), but given the sluggish pace of growth and the lack of overall inflation, the market expects the BOJ to leave rates alone into 2008.

However, the BOJ wants to normalize interest rates. If the Japanese economy were to slow significantly or even slip into recession, the BOJ would not have many tools to help jumpstart economic growth with interest rates at such low levels.

“A key decision facing the new administration will be the replacement of BOJ Governor Toshihiko Fukui, whose term expires early next year,” Robinson says. “The politics surrounding

future BOJ actions have become a little more complicated lately. Governor Fukui still appears adamant that a rate rise is required without delay as part of reducing the interestrate differential between Japan and the rest of the world, and thus stemming the outflow of Japanese yen that has been fuelling global liquidity.

“However, the newly appointed Minister of Finance, Fukushiro Nukaga, has urged considerably more caution, implying in a statement recently he would not look favorably upon a rate increase, and that the cost of borrowing should not be pushed up until deflation is a distant memory,”

he adds.

G7 Meeting

Prior to the G7 confab on Oct. 19, some European finance officials had been complaining about the high level of the euro (EUR), which led some market analysts to speculate the G7 would adjust its language regarding exchange rates. However, the recent G7 meeting saw little in the way of fresh news or direction for global currency market traders.

“In their statement, Ministers remained silent on the recent weakness of the U.S. dollar, restricting commentary to the previously agreedupon line that currency values should be determined by market forces” says Robinson. “The release of the G7 communiqué from Oct. 19 undermined the position of any currency trader betting on a deviation in the long-standing U.S. policy to refrain from supporting the currency’s value.”

U.S. housing and the broader economy

Many questions remain regarding the state of the U.S. housing market recession, including how much worse will it get and what the impact might be on 2008 U.S. economic and global growth.

Ideaglobal economists warned in their Global Forex Outlook Q4: “In the event the housing correction is much more marked and causes a U.S. recession, USD/JPY could see a serious test of 105, below which we think it may get uncomfortable for the Japanese. Politics will make it difficult for the BOJ to consider intervention and at the most they could slow the move rather than reverse it.”

Yen outlook

Despite the recent dollar/yen volatility, the pair has remained within a roughly 118.00/112.00 range since late August (Figure 1). With the yen remaining captive to the whims of global carry trade players, movement in the Japanese currency will remain dependent on overall levels of market volatility and global risk appetites.

For now, currency strategists agree that economic and political fundamentals will have little impact on the overall action of the Japanese currency.

“It looks like we’ve shifted into a 113-118 range,” says Thomson FX Hub’s Coleman. “And 118 has become a formidable barrier. I’d be selling rallies in dollar/yen and euro/yen.” Forex.com’s Dolan has been monitoring the CBOE Volatility Index’s (VIX) correlation with the yen carry

trade (Figure 2).

“The VIX had been averaging around 12-15 in June [as dollar/yen was rallying into the 124 region],” he says. “At the peak of the market turmoil in August, the VIX soared to 37.5 as yen carries were dropped.”

In early October, as volatility retreated, the VIX dropped back to the 15-18 region. However, on Oct. 19, the VIX had surged above 22 when the U.S. stock market turned sharply lower.

Dolan suggests forex traders monitor the VIX as a potential timing tool for yen carry trades.

“On moves above 18-20 in the VIX, it might not be a good thing to be looking at the yen carry trade,” he says. “It is very much a real-time situation. If you’re trading the yen, you’ve got to be watching the equity markets.”

Implied volatility in three-month dollar/yen options is another measure forex traders could monitor. Ideaglobal’s Powell has been watching this indicator in recent weeks, noting a recent summer implied volatility low at 6.7 on July 20. However, in mid- August, as the dollar/yen pair retreated below 112.00, implied volatility soared to 14.9. As of Oct. 18, implied volatility stood at 9.1.

“We are still in a period of elevated volatility, although it has calmed down from the August peak,” Powell says.

Forex traders are well aware that low volatility is ideal for successful carry trades. Otherwise, price spikes can wipe out the profits from bullish interest rate differentials.

“We expect volatility to remain elevated between now and year-end, which should keep the dollar/yen below 120.00,” Powell says.

Ideaglobal forecasts the dollar/yen at 112.00 at the end of 2007, and at 110.00 at the end of the first quarter 2008.

“If there is further turbulence in U.S. equity markets it would not be a good time to be long the dollar/yen,” Powell notes.

BY CURRENCY TRADER STAFF