Since the breakout of Greek disease earlier this year, the euro has behaved like a predictable cur, currently ranking among the world's worst performing currencies of 50 regularly traded, along with the Slovenian tolar, the Bulgarian lev, the Albanian lek, the Danish krone, the Hungarian forint, and the vermin-like Venezuelan bolivar.
At the other end of the scale, the dollar holds rank as one of the world's best performing currencies, along with the yen. While the underlying outlook for the dollar remains generally restrained, the world's reserve currency has over for more than a year shown bouts of recovery, re-establishing at least some of its status as a safe haven asset, as also seen in the decline in US bond yields. The economic outlook for the US (where unemployment continues to float along just below 10%) remains benign to anaemic; much the same can be said for the Eurozone. But the performances of the dollar and the euro have become starkly divergent in the past few months.
Beyond the dollar's traditional status, investors continue to baulk at the Eurozone's continued inability, or refusal, to back promised potential bank bailouts with taxpayer funds, as implemented in the US. This has further undermined the euro. In Greece, Portugal and Spain, rates quoted for credit default swaps (CDSs) on country debt show a remarkable correlation with rates quoted for bank CDSs within those individual countries. This is saying, in effect, that investors believe that, in these countries, sovereign default is just as likely as bank default. If a country is unable to bail itself out, how will it bail out its banks?
In Eurozone economies with sounder finances, and where exports play a significant role in economic activity, such as Germany, CDS rates for both sovereign debt and bank debt have eased off sharply over the past few months. Rates for both quoted in the likes of Greece, Portugal and Spain exploded exponentially in March this year, and have remained high. But the euro's fallout has brought benefits to exporter countries within the Eurozone.
At this point, few countries, anywhere, seek strong currencies. US president Barack Obama recently set a goal for the world's biggest economy to double exports within five years. Structurally, the fundamentals for the dollar remain weak; the current account, and its main component, the trade deficit, remain large to huge, and are now back to pre-recession levels.
These deficits require a weaker dollar, to stimulate exports, which would in turn lift the US economy. Measured on a trade weighted basis, the dollar has been relatively volatile over the past few years, and is currently trading at levels seen around 1997. But these levels are not as weak as seen in the early 1990s, before the greenback staged a major bull market cycle, taking it well into the early parts of this decade, when a protracted bear phase kicked in.
If the dollar strengthens from here, US exports would be relatively lower, crimping economic growth. The relatively strong yen similarly remains a concern for exporters in Japan; the same can be said for exporters in other countries where currencies have remained relatively strong, such as Switzerland, Canada, and Brazil.
Looking more generally at stronger currencies, individual development country economies continue to underpin the relative strengths of the likes of the Indonesian rupiah, Malaysian ringgit, Colombian peso, Peruvian sol, and Ukrainian hryvnia. The Chinese renminbi remains, of course, largely tied to the dollar, and continues to attract criticism that its relative weakness for most of this decade has created imbalances in the global economy.
Despite further recent moves by China to further relax the renminbi's trading ranges against the dollar, the US lobby aimed at having the renminbi officially classified as a manipulated currency continues to grow. The lobby accuses the renminbi of being undervalued, and of being a mechanism that has imported substantial unemployment to the US. The political fall out from the potential slapping of duties on Chinese imports to the US, if the renminbi is indeed to be classified as manipulated, would create fresh stresses that the US may well want to avoid.
The risk appetite for developing country currencies and equities continues, generally, to improve. With China the main exception, and a big one, developing country equities have exhibited relative strength, underpinning confidence in many developing country currencies. The MSCI world equities USD index, a very broad global measure, has fallen 14% from its recent highs, compared to a smaller fall of 12% in the MSCI emerging markets USD index.
Commodity currencies have weakened somewhat in recent months, in line with the general retracement in dollar commodity prices, traced, not least, to China's multi pronged attack on domestic property price bubbles. In the past while, prices for lead, nickel and zinc have each declined by a third; copper and aluminium have each fallen by around a fifth. Precious metals have held up relatively well, with gold bullion down 5%, platinum by 13%, and silver by 9%. Even so, for now at least, the euro remains a dog of note.
