October 2010 Currency Exchange Rates

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The U.S. dollar’s rate of depreciation picked up speed in October, falling by 1.4 percent against Canada’s “loonie,” 5.7 percent against the euro and 3.0 percent against the yen. On a trade-weighted index basis, the dollar gave up 2.6 percent against a basket of 26 currencies.

Probably the biggest reasons for the dollar’s October slide were the markets’ expectations of further quantitative easing by the Federal Reserve and the outcome of the Group-of-20 (G-20) meeting in late October. The G-20’s joint communiqué said that a global economic recovery is underway but remains uneven. Officials warned of the need to move toward more “market-determined” currency exchange rates that reflect underlying economic fundamentals, and pledged to “refrain from competitive devaluation of currencies.”

“The G-20 final statement could be seen as a fragile truce in the so-called [currency exchange] war issue,” said Roberto Mialich, foreign-exchange strategist at UniCredit Bank in Milan. “But with the Fed decisions on [quantitative easing] still pending these efforts may not be enough to help…the beleaguered U.S. dollar.”
 

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Canada: The loonie may have received a modicum of additional support from Canada’s expanding economy. Real GDP increased by 0.3 percent in August, lifted mainly by oil and gas extraction, wholesale trade, and manufacturing. Not everyone agrees with that explanation, however. "The details [of the GDP report] don't show broad-based gains," said Jonathan Basile, VP of economics at Credit Suisse Securities, in a note. “Canadians basically bought cars, filled them with gas to go to the supermarket and to shop for some home furnishings (which only partly reversed a record drop). Most other sales categories were either up a little or down.”

Europe: Monetary policies that work for the entire European Union are becoming increasingly difficult to create as member countries continue to diverge into two tiers. One tier -- perhaps best represented by Germany -- is expanding and the other -- composed primarily of the southern, “Club Med” states -- is contracting. The currency market has chosen to ignore to the ongoing problems among the contracting members (e.g., stalled budget talks in Portugal and renewed debt woes in Greece) and concentrated on “lift” the regional economy is garnering from Germany.

Japan: The yen strengthened despite a 1.9 percent drop in industrial production during September (the fourth straight month of decline), continued “jawboning” by Japanese officials, and promises of even more stimulus spending. Instead, the markets appear to have justified the yen’s appreciation on the basis of the rise in Japan’s trade surplus. That surplus was $9.8 billion in September, 54 percent above year-earlier levels.