Investors are waiting for more bullish sentiments from the United States


Aug 05 - 11, 2002


Foreign exchange markets' fluctuations have become the gauge to judge the economic and business activity of any country. It seems to me that in this hi-tech world, foreign exchange has become the first and the last indicator. US dollar has lingered down more than 11 per cent against Japanese yen, 9 per cent versus sterling, 13 per cent versus Euro and Swiss franc. So it can be judged that something bad has happened in the US that diminished dollar demand. The dollar fell to its lowest since late September at 115.34 yen, and fell below parity to $1.0210 versus Euro. Meanwhile, the Swiss franc also approached its strongest levels since October 1999, traded at 1.4350 per dollar. On the other hand sterling also appreciated to 27-month high of $1.5862 against the dollar.

On Wall Street, the Dow Jones industrial average lost almost 23 per cent to close at its lowest level since October 1998; the Nasdaq Composite index fell 36 per cent to its lowest close since April 1997; and the S&P 500 stock index lost 30 per cent, also the lowest level since April 1997. With that position squaring, the dollar came under the spell of US equities when giant companies faced accounting scandals. US drugs giant Merck had recorded revenue of over $14 billion from its pharmacy-befits subsidiary fuelled worries about corporate accounting and stirred jitters over US stock valuations. US corporate crisis deepened when World Com filed bankruptcy on July 21, 02. Persistent losses in US assets market shook investors' confidence throughout the world and, in wake UK stock markets also tumbled and, the leading FTSE 100 index dropped below 3,800 for the first time since August 1996.

Dollar losses widened as the market ignored the efforts made by the President George W. Bush to clean up corporate America. Wall Street welcomed Bush's efforts to get tough on company leaders who engaged in the type of corporate pranks that have undermined confidence. US top officials continued their efforts to restore the investors' confidence but all wasted. The embattled dollar gave up more ground to the euro and yen after Federal Reserve Chairman Alan Greenspan delivered a relatively upbeat message on the US economy. The Fed chief praised the economy's resilience in his twice-yearly monetary policy report to Congress, but he cautioned that the damage reeked by corporate scandals and stock declines would take time to mend. Alan Greenspan offered a word of caution to forecasters looking for a further decline in the value of the U.S. dollar.

Dollar losses sparked versus Japanese yen after the news that Bank of Japan's "Tankan" corporate sentiment survey came in much better than expected. Diffusion index for large manufacturers improved to minus 18 from minus 38 in the previous survey in March, beating forecasts for an outcome of around minus 26. On the other hand the Euro-zone manufacturing index showed output growing a little faster at 53.5 from 53.4 in May. Meanwhile, data showed UK manufacturing activity barely grew at all in June. UK Purchasing Manufacturing Index fell to 50.5 in June against a consensus forecast of 53.2, its weakest since February. However, US Institute for Supply Management reported its index for manufacturing activity rose to 56.2 in June from 55.7 in May but at the same time the Institute for Supply Management's non-manufacturing index fell to 57.2 in June from 60.1 in May. These manufacturing gauges in the respective regions kept driving the currencies.

Dollar tumbled against major currencies amid mounted jitters about job conditions in United States. Overnight, US jobs outside the farm sector rose 36,000 in June, far less than the 86,000 forecast on average and jobless rate rose to 5.9 per cent from 5.8 per cent in May. The US faced real trouble on persistent falls in the consumer confidence. University of Michigan's economic data showed consumer sentiment at eight-month low and fell from 92.4 in June to 86.5 in July, the lowest reading since November 2001. Subsequently dollar slightly pared its losses after the news that the University of Michigan's U.S. consumer sentiment index final reading for July was upwardly revised to 88.1. Additionally, the Federal Reserve Bank of Philadelphia said its business conditions index dropped to 6.6 in July, the lowest level since December 2001 from 22.2 in June. More dollar bearish sentiments surfaced after the news that the US' international trade deficit unexpectedly widened to an all-time high of $37.64 billion in May, from an upwardly revised $36.14 billion in April. America's massive trade gap has become cause of concern to dollar bulls in light of the recent stock market declines and sinking investor confidence. During 1990s the trade deficit was financed by wave of foreign capital reaching America's shores. But that picture is changing as US assets fall out of favour with foreign investors, putting pressure on the dollar.

The role of any central bank is to stabilize the foreign exchange rates. Bank of Japan intervened in the global forex market on Friday June 28, with coordination of European Central Bank and Fed to stem yen gains that in return supported batter dollar. Before this the Bank of Japan intervened several times and sold yen against dollar during the year. Initially, yen highs sparked after the comments from Finance Minister Masajuro Shiokawa that financial authorities believe a weakening of dollar is in progress. Sluggish US economic growth also dampened economic prospects in other countries. Japan's industrial output fell 0.7 percent in June for the first time in five months as exports to the United States lost momentum, raising worries that the key force behind Japan's recovery may be waning. Japanese exporters are suffering both from a slump in U.S. demand and weak dollar.

Externally, dollar gained support from the Swiss National Bank (SNB) cut of 50 basis points in its target range of benchmark London Inter-bank Offer Rate (LIBOR) to 0.25 — 1.25 per cent on Friday 26, July 02, an action taken to weaken the Swiss franc's strength and it worked. The SNB has kept the lowest interest rates among major economies in an effort to boost growth. SNB Chairman Jean-Pierre Roth said the strong Swiss franc is a "problem" for the country's exporters. The Swiss central bank has loudly protested against franc strength, and said that they have seen growth in gross domestic product at considerably below 1 per cent in 2002, as exporters lose competitiveness because of a strong currency. The SNB's move generated speculation that a concerted interest rate cut by global central banks may be planned because of the turbulence in global equity markets. The SNB already lowered its benchmark interest rate target by half a percentage point on May 02, 2002 citing the franc's strength

Dollar slightly retraced from multiple years lows against major currencies because US funds and banks were repatriating earnings from overseas to fulfil redemptions. But dollarís recovery is not convincing and as it is still trading close to multiple years lows and, investors are waiting for more bullish sentiments from the United States as recent dollar losses have fanned jitters across the board.

Dollar performance vs major currencie sin calendar year 2002

As of July 30, 3003