The US dollar continued its rally today, crushing all comers. The euro is at a seven-month low of 1.0575 against the dollar this morning. EUR parity with USD becoming a more likely scenario as ECB president “Super Mario” Draghi announces he is going to feed the ECB’s quantitative easing program a yellow mushroom next week.
The pound sterling is flirting with breaking through support at 1.50, and the Swiss franc is also under pressure in dollar terms. The Japanese yen is also near recent lows against the greenback.
This dynamic is being fueled by expectations of a hike in benchmark interest rates by the US Federal Reserve, while the European Central Bank, Swiss National Bank, and Bank of Japan announce or plan devaluation of their currencies.
‘Roided Up Dollar
The dollar is flirting with a new 2015 high, after breaking upward above the psychologically important 100 level on the DXY index. The dollar had been trying for nearly a week to make that final push, rising above 99 on several occasions.
The Fed is all but certain to raise benchmark interest rates on December 16th. Higher interest rates increase the returns of savings held in dollars. It also raises the cost in other currencies of buying dollars.
In anticipation of that, forex traders and foreign companies with dollar-denominated debt are loading up. This is driving the dollar higher, ahead of the actual event.
Central Bank Divergence
The effect of the Fed’s actions are being amplified by growing quantitative easing and other stimulus measures by the world’s other major central banks. It’s widely assumed that the European Central Bank will increase its stimulus measures at its December 3rd meeting. The Bank of England is letting stand expectations that a rate hike could be as far as a year away.
In anticipation of a devaluation of the euro, a brisk selling in the Swiss franc has been occurring. This has driven the CHF to a five-year low against the dollar. While unproven, it is widely assumed that the Swiss central bank is preemptively devaluing the franc ahead of the ECB meeting. A strong Swiss franc compared to the euro would cut exports and suppress the Swiss economy.
Helicopter Money In Japan
The Bank of Japan, which has gone where no central bank has gone before in the quest for economic recovery, is upping the ante to handing out money to low income citizens. In a program announced today by Japanese prime minister Shinzo Abe, support for rural areas hit by the Trans-Pacific Partnership free-trade deal, and cash payouts to low-income groups to spur private consumption will be implemented.
There’s Always A Winner
The pummeling the euro has taken at the hands of the dollar is not only helping EU exporters. US corporations with multinational operations are raising euro-denominated funding at a record pace. Such funding has reached over $73 billion, a growth of 25% compared to last year.
Eventful Week Ahead
If things play out as expected next week, traders anticipate new highs for the dollar and new lows for the euro. On December 2nd, Fed Chair Janet Yellen speaks before the Economic Club of New York. On December 3rd, the European Central Bank meets. The only question is by how much will they expand rate cuts and quantitative easing. There is no question that more measures will be announced. Later that morning, Yellen will speak before a joint committee in Congress.
The event most likely to sway the Fed’s actions comes on Friday, when non-farm payrolls for November are announced. Any growth above 200,000 will lock in a rate hike. It would take a very disappointing report to stay the Fed’s hand on December 16th.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.