August 2010 Currency Exchange Rates: U.S. Dollar Slips Again

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The U.S. dollar depreciated “across the board” in August: by 0.2 percent against Canada’s “loonie,” 0.7 percent against the euro and 2.4 percent against the yen. On a trade-weighted index basis, the dollar gave up 0.8 percent against a basket of 26 currencies.

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Canada: The loonie essentially moved sideways in August as the impact of a slight rise in oil’s price was nearly offset by the downward revision of 1Q2010 GDP (to 5.8 percent, from the 6.1 percent initially reported), and a weaker-than-expected 2.0 percent GDP rise during 2Q.

Europe: With no recent confidence-rattling “blow-ups,” the European banking and sovereign debt problems seem to have receded into the back of the markets’ collective conscience. Even Standard & Poor’s downgrade of Ireland’s sovereign debt was largely ignored. Attention appears to be concentrated instead on reports of the quickening pace of 2Q GDP growth in the 16-nation Euro Area, more optimistic economic sentiment, and rising exports.

Japan: The markets appear to have concluded that Japan’s fiscal problems will not come to a head in the near future, and thus bid up the yen’s value to levels not seen since 1995. Attempts by finance officials to “jawbone” the yen lower via threats of intervention came too late in August to make a difference. “Verbal interventions aren’t working any longer,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “Upward pressure on the yen won’t go away.”

Nearly as ineffective (at least so far) was the emergency meeting held on August 29, during which the Bank of Japan (BOJ) decided to boost liquidity available to banks by another $119 billion. In fact, the yen appreciated against all 16 of its most-traded counterparts after the BOJ’s announcement. "If the Bank of Japan's policy [response is limited to] increasing its liquidity provisions, it's not enough to substantially weaken the yen," said Camilla Sutton, a Bank of Nova Scotia currency strategist in Toronto.

As analyst Mike “Mish” Shedlock recently observed, ”The sad state of affairs is every country wants a weak currency to fuel exports. The reality is it's mathematically impossible. The irony is how hard it is for Japan to destroy its currency, even when that is the clearly stated goal.”