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Dollar Pummeled As Risk Firms, USD/JPY Drops Back Below 94
John Kicklighter

  • Dollar Pummeled As Risk Firms, USD/JPY Drops Back Below 94

  • Japanese Yen’s Rally After G7 Statement Draws Currency War Terms

  • Euro Rising Towards 1.3500 after Draghi Plays Down Stimulus, Hollande Euro Fears

  • British Pound Plunges Ahead of CPI and FX Statement

  • New Zealand Dollar: Finance Minister English Says Little to be Done on High Currency

  • Swiss Franc: SNB Says EURCHF 1.2000-Floor Will Remain, Not Manipulation

  • Gold Slowly Pitches Higher after Group of Seven Say No FX Wars

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Dollar Pummeled As Risk Firms, USD/JPY Drops Back Below 94

The dollar was under pressure on two fronts Tuesday. On one hand, the US equity indexes – benchmarks for investor sentiment – climbed to fresh, five year highs. A more atypical line of weakness for the benchmark currency came from an unexpected Group of Seven (G7) statement zeroing in on exchange rates. The initial release seemed to carry little weight in the FX and capital markets. In the short paragraph, the policy group emphasized that markets should set exchange rates. Furthermore, it asserted that monetary and fiscal policy would be applied to meet domestic objectives – and not target exchange rate levels. As we have seen time and again, the market does not move on abstract commentary; and this certainly fit the category. With no target for these concerns, no accusations that it was currently an issue and no consequences floated for offenders; the market was left to loosely assume this was a reaction to concerns of ‘Currency Wars’ trumpeted in the financial media.

Clearly, some at the G7 were not satisfied with the markets lack of confidence in the statement’s commitment; because an unidentified official followed up on the statement to say it was ‘misinterpreted’ and the rapid drop in the Japanese yen was the implicit target of the impromptu remarks. After that was made clear, the FX market responded abruptly. The yen dropped across the board and USDJPY received the biggest hit with a 0.9 percent drop. For the greenback alone, this particular news carries substantial weight. While pairs like AUDUSD and GBPUSD have seen significant progress for the benchmark currency; it is the USDJPY’s 8.1 percent rally from the beginning of the year to Monday that accounts for the bulk of its relative strength.

The short-term implications for a currency (the yen) that has been down so aggressively are clear; but there is a deeper corollary here for the dollar. While Japan’s efforts have been highlighted by the G7, the United States’ own efforts are palpably untouched. That means that there is tacit approval of the Fed’s ongoing, $85 billion-per-month QE3 stimulus program; and a high barrier of entry for other policy groups to leverage a credible effort to offset the move. Besides a wholesale risk appetite drive, that is one of the most effective ways to drive the dollar lower. The Dow Jones FXCM Dollar Index’s (ticker = USDollar) 0.4 percent drop on the day – the biggest daily decline in a month – certainly speaks to that concern. And, as if to strike while the iron’s hot, Atlanta Federal Reserve President Lockhart said in a speech that he expected QE3 purchases into the second half of 2013. Though, he also said equities were not in a bubble. That point is debatable, and dollar bulls’ greatest hope…

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