Brave New World

US Dollar sell-off continues 01/06/2009

Sterling has made spectacular advances against the USD today, rising from 1.62 to 1.64 in two hours, as positive manufacturing and house price data has firmed up positive sentiment towards the currency. Cable subsequently reached a high just below 1.65 by 19.30GMT. The move seems to have caught many market professionals off-guard, as sentiment was geared towards some type of correction of the recent dollar sell-off. Although the Sterling move was perhaps the most noteworthy move today given the UK’s relatively weak economic outlook- currencies from stronger economies, the AUD and NZD also made similar gains against the greenback, this is still a mostly USD weakness story. The USD index has had its biggest one month decline in 25 years- the year of the Plaza agreement. A significant breakdown in the US treasury yield-USD index is taking place, and with it many of the assumptions that have underpinned FX forecasting for the last few months. Following last week’s record breaking steeping of the US Treasury curve, coupled with a sell-off in the USD, focus is turning to the American economy’s long-term creditworthiness and inflationary risks associated with quantitative easing. The issue is, needlesstosay, red hot in China. 

At the beginning of US Treasury Secretary Geithner’s meeting in China Tim Geithner said: “China is already too important to the global economy not to have a full seat at the international table.” He added: “The United States will fully support having China play a role in the principal cooperative arrangements that help shape the international system, a role that is commensurate with China’s importance in the global economy.” He also renewed the pledge that the administration would cut its fiscal deficits and promised “very disciplined” future spending, possibly including reintroduction of pay-as-you-go budget rules. 

In a Q&A session in Beijing following his speech, he said: “We believe in a strong Dollar.” He added: “Chinese financial assets are very safe.” His response drew laughter from the audience; something with which the market would concur.