FYI | May 15 2006
By Chris Shaw (Tokyo)
In recent weeks the US dollar has lost more than 5% of its value against the yen, the move reflecting expectations of higher interest rates globally at the same time as the US cycle of increases to official rates has all but ended.
As ANZ Bank notes, the move out of the greenback also highlights concerns over the size of the twin deficits in the US economy, which reflect global trade imbalances and so are likely to require some rebalancing of exchange rates to address.
The weakness in the US dollar reflects something more though, as previously the currency has been the world’s reserve currency but its attraction from this perspective has also been declining of late. This changing perception has led to central banks, especially those in Russia and the Middle East, to diversify their reserve holdings out of the US dollar and into other currencies.
ANZ suggests the Japanese have also started Asia’s move to adopt such a strategy by buying euro-denominated assets, which is likely to have helped the euro appreciate strongly against the yen in recent years. This has also been good for Japanese exports, which in turn has benefited the economy as it recovers from recession.
In the bank’s view the adjustment process for addressing the trade imbalances globally but in particular in the US has now shifted to the Asian currencies thanks to recent comments by the G7, adding to the pressure on these currencies begun when the US Treasury examined the issue of China as a currency manipulator.
In combination with the expectation for higher interest rates in Japan it is not surprising the result has been a weaker US dollar and a stronger yen, and while this trend is likely to continue the bank suggests some intervention by the Japanese is likely to slow down the pace of the appreciation of its currency in the short-term.
With the US dollar weakening and currency prices remaining strong, the bank suggests it is possible the Aussie dollar could move through US$0.80 in the short-term. Its medium-term view remains for a decline in the Aussie against the greenback over the second half of the year.
The bank is forecasting an AUD/USD rate of 74c by the end of June compared to about 78c now, while by the end of December it expects the rate will be around 70c. In contrast, the bank expects the Aussie dollar will lose ground to the yen, forecasting a decline from about 85 currently to around 80 yen to the dollar by June and 70 yen to the dollar by December.
In terms of other currencies, the bank expects the yen to continue to gain from its current level of about 110 to the US dollar to 108 by June 30 and 100 by the end of the year. For the euro it sees little change though, as despite some movement in the intervening months it suggests the exchange rate at the end of December should be roughly in line with the current level of 129.