Dollar hits Euro and Yen, oil hits all of them

Tuesday, May 31, 2005

In the race of the three big ugly ducklings US dollar, Euro and Yen, the US dollar has staged a massive comeback this year.

After finishing 2004 at a record low of 1.3670 dollars against the Euro the greenback has managed to build up an impressive rally that propelled it 10 percent upwards to a seven-month high of 1.2306 dollars.

Against the Yen the US currency incrased 7 percent, with the dollar trading up from 101.65 Yen to a high of 108.80 Yen, before correcting to 104 Yen and recovering again to today's level of above 108 Yen.

The Euro could not hold on to its gains against the Yen seen this spring and plummeted lastly almost as strongly as to the dollar.
I call the three curencies the three big ugly ducklings for the following reasons.
US Dollar:

Current account deficit
Trade deficit
Budget deficit
Inflation fears
Slower growth

Euro:

Budget deficits
Political worries
Unemployment
Inflation fears
Slower growth

Yen:

Budget deficits
Stagflation
Chinese competition
Demographics
Dependence on energy imports

All in all there are no compelling reasons to get bullish on any of the three. The duck-march can continue and the least weak one will be the winner of the year.
What has changed the picture the most is the new threat to the Euro that the European constitution will not come into effect. If the Dutch will reject the constitution on Wednesday the common currency is likely to be hit again.
A weaker Euro will in turn burden Europe's economies because of higher commodity and especially oil prices through the exchange rate effect.