What to Expect for the US Dollar

The US dollar continues to behave very differently against the Japanese Yen and every other major currency. Although the dollar weakened against the Yen, it has soared the Euro, British pound and Australian dollar. In fact, year to date, the only currency that has outperformed the US dollar is the Japanese Yen. The reason for this divergence is because interest rate expectations are once again the primary drivers of currency prices. The US is expected to cut interest rates aggressively over the next 12 months, but the verdict is out on whether rates would fall as low as 1 percent. For the Eurozone, 100bp of easing has already been priced into the markets while traders are expecting 150bp of easing from the Bank of England by next October. Even the Reserve Bank of Australia is expected to cut another full percentage point. The Federal Reserve has been cutting interest rates since last August so they only have a limited amount of room to ease whereas the last move made by the European Central Bank in July was an interest rate hike. Therefore we expect the dollar to continue to fall against the Japanese Yen but strengthen against the Euro, British pound and Australian dollars.

Why Commercial Paper

For our readers who may be confused by the Fed’s action in commercial paper, it is important to understand that the commercial paper market is where companies go to raise short term money to buy inventory, meet payroll obligations and pay bills. In recent weeks the commercial paper market has been under a lot of stress due to the lack of buyers for the commercial paper, making it difficult for companies to meet their day to day obligations. The Fed’s hope is their willingness to be the buyer of last resort will help to tie these companies over and prevent bankruptcies, making investors more confident in the process.

Meanwhile the FOMC minutes revealed that the Fed was considering cutting interest rates last month. The world has changed quite a bit since September 16 and even if the minutes were hawkish, the Fed has no choice but to cut interest rates – it is not a matter of if, but a matter of when.