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Dollar bulls should be licking their lips.
The prospects for the U.S. currency haven’t looked so good for quite some time.
The euro, which has spent many months largely ignoring the euro zone debt crisis, is now on the slide as Greece edges closer to doing the unthinkable — bringing back the drachma.
The yen, which has long been an alternative or even superior safe haven to the dollar, is likely to lose favor after the Japanese prime minister vowed to halt its rise.
And even the Australian dollar, once the darling of the high-risk seekers, has lost its shine.
As fears about the pace of the Chinese slowdown intensify, even moves by Beijing to stimulate demand by cutting bank reserve requirements wasn’t enough lift sentiment towards the Aussie.
All this comes as new data indicate that although the U.S. economy may not be steaming ahead, it is at least hanging in there. Friday’s rise in the University of Michigan’s consumer confidence index, returning to levels last seen in January 2008, will further discourage the Federal Reserve from an early increase in quantitative easing.
New data this week, including regional business surveys, industrial production and retail sales, could of course tip the balance of expectations. Also, the minutes of the last FOMC come out Wednesday, providing further insight into Fed thinking.
However, events outside the U.S., as much as those inside, are likely to feed the dollar’s advance.
Several members of the European Central Bank admitted over the weekend that Greece could exit the euro, given the country’s failure to form a government willing to carry out its bailout agreement.
With the borrowing costs of other debtor nations rising on fears they could follow Greece, the euro has now fallen back under $1.30 for the first time since early this year.
The yen is also finding its attraction as a safe haven on the wane.
Prime Minister Yoshihiko Noda said in an interview over the weekend that the country needs to fight against a strong yen as well as against deflation, and that Tokyo is prepared to take unilateral action if needed. The euro zone crisis is the biggest risk to the Japanese economy, he said, indicating market intervention is not only more likely but is becoming urgent.
As Tokyo would be selling the yen to halt its rise, the country’s ability to intervene is virtually limitless.
Even high yielders like the Australian dollar are swiftly losing their edge against the U.S. currency.
In the Aussie’s case, developments in China have been key as recent economic data suggests that the economy of the world’s second-largest economy and Australia’s major trading partner is slowing more rapidly than expected.
Beijing rushed over the weekend to ease policy for the third time in the last six months. But financial markets aren’t convinced the move will work. Two previous cuts to bank reserve requirements–in December and February–haven’t prevented deterioration.
As a result, the Australian dollar has continued to lose support, sinking back under parity against the U.S. dollar for the first time since December.
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The Source is WSJ.com Europe’s home for rapid-fire analysis of the day’s big business and finance stories. It is edited by Lauren Mills, based in London.
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