Another week, another set of losses for the dramatically diminishing dollar, which yesterday slumped to its lowest level since October 1997 in trade-weighted terms.
The continuing sell-off came amid a series of events that should, in theory, have helped the greenback. The Federal Reserve released a broadly hawkish monetary policy statement, yesterday's US trade data was far better than feared and the US treasury declined to formally cite China for currency manipulation, which would have been expected to drive further Asian gains against the dollar.
Yet sentiment has turned so decisively against the dollar that it still fell, sliding 1.1 per cent to $1.2879 to the euro, 2.1 per cent to $1.8897 against sterling and 1.9 per cent to SFr1.2022 against the Swiss franc, hitting new one-year lows against each, and 1.3 per cent to Y110.50 against the yen.
The dollar has now lost 6-8 per cent against each of these currencies since the start of April. The selling has been driven by two big factors. First, relative interest rate differentials continue to move against the dollar. Despite the Fed statement, the market is only pricing in a 40 per cent chance of a June rate rise. In contrast there is increasing talk that the European Central Bank may sanction a larger-than-expected half-point rate rise next month, that Japan could initiate its first rise of the cycle as early as next month and that the Bank of England may raise rates before the year is out.
Second, since last month's G7 conference, markets have increasingly focused on the huge US current account deficit, 7 per cent of gross domestic product, and the role a weaker dollar will almost certainly have to play in order to bring this imbalance back to a more sustainable level. The repercussions spread to a swathe of emerging markets yesterday, sending the Brazilian real down to R$2.1355 to the dollar for example.
Carry trade investors such as hedge funds were said to be cutting their exposure to emerging markets amid rising volatility in the major currencies in which they borrow.
