Dollar Punished

The US dollar is getting punished; suffering steep broad based losses today. The spark that has driven the euro and sterling through their recent caps near $1.40 and $1.60 respectively, the Australian dollar, Swiss franc and Japanese yen to new highs and the Canadian dollar through parity, appears to have been initially triggered by unexpected tightening by the Monetary Authority of Singapore, which is achieved through the currency appreciation against an undisclosed basket.

With the US Treasury report on currency market manipulation expected tomorrow, and pressure mounting ahead of the G20 meeting next month, there is speculation that quicker Asian currency appreciation may be at hand. This hit the already fragile dollar. The beleaguered buck remains vulnerable to headline risk in North America if the PPI is lower than expected and/or the trade deficit larger than expected.

Singapore has a unique and rather nuanced, but the measure s taken would seem to suggest officials are embracing a stronger currency after already seeing about 8.5% currency appreciation thus far this year. The driving force appears to be Singapore’s concern of inflation where the 2-3% target which the central bank has warned will likely overshoot and stay elevated in the first half of next year.

Even though there was some market talk that a couple of Asian central banks may have intervened, Singapore’s move has captured the market’s imagination as spurred talk of a “secret” agreement to allow the Asian currencies rise to defuse the so-called currency war. Talk is that the quid pro quo is for the Fed to hold off QEII seems wide of the mark. The US Treasury is set to release its report on currency market manipulation tomorrow and, based on the recent heightened rhetoric coming from Washington, the odds seem to favor the citation of China. This, coupled with the nearly $200 bln jump in Chinese reserves in Q3 (of which Chinese officials suggest is due to the valuation effect of the rise in the euro) has fanned expectations, which after the weekend G7/IMF meetings had seemed to lower those very expectations.

Even though the dollar’s slide has left short-term technical indicators over-extended, the greenback faces headline risk early in the North American session. Given the Fed’s concern about inflation, a soft PPI would likely weigh on the dollar. The consensus is for a 0.1% increase. If anything the import prices warn of downside risk. The August US trade balance report also poses risk. A poor figure could weigh on GDP expectations for Q3, which are coming in just below 2%. Seasonally, August often sees an increase of imports as the holiday season is prepared for. Data from the West coast ports point to a multi-year high in inbound containers. Also, July’s exports had been flattered by a 62% rise in aircraft exports, but Boeing reported a decline in shipments in August to the lowest of the year.