US Dollar Appreciation Eases

Consensus Forecasts

The rate of appreciation in the US dollar has eased in recent weeks following its surge in February and early March. Its loss of steam coincides with signs of weakness in US consumer confidence, which has dimmed optimism in the 2013 outlook. Underlying support for the currency, though, continues to come from expectations that the US economy will be able to outperform the euro zone over the next 6-12 months. Clearly, the poorly handled financial crisis in Cyprus and more signs of trouble in Portugal have kept the euro under downward pressure. A prolonged recession in some peripheral countries might even force the European Central Bank to consider a more radical monetary stance. In Tokyo, Mr. Haruhiko Kuroda, the new governor of the Bank of Japan, held his first council meeting on April 4, in which he fleshed out plans to meet the ambitious 2.0% inflation target. Quantitative easing in Japan is likely to be more aggressive than that of the US, which makes the yen vulnerable to further weakness. Yet a significant amount of depreciation has already been priced into expectations and is embedded in its 20%-plus drop over the past six months. Despite the financial stresses in Europe, a world of cheap money has fueled the appetite for risk and demand for high yielding assets. For a number of emerging economies, low rates in the West has created unwanted pressure on asset prices and currency appreciation. Some have countered ‘hot money’ inflows through FX intervention and warned of capital controls to protect exports. Sensitivities to the latter have become more acute following the competitive devaluation of the yen. Most Asian currencies, notably the South Korean won, have either remained stable or weakened despite relatively positive fundamentals, due to concerns about unfair trade advantages.

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