December 2012 Currency Exchange Rates

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The U.S. dollar depreciated in December against two of the three currencies we track: by 0.8 percent relative to Canada’s loonie and 2.1 percent against the euro; however, the dollar appreciated 3.2 percent against the yen. On a trade-weighted index basis, the dollar weakened by 0.6 percent against a basket of 26 currencies.

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Canada: The loonie’s appreciation resulted from the lagged effects of marginally stronger GDP growth in October (+0.1 percent), record-high exports of farm, fishing and intermediate food products (C$2.8 billion, up 18.3 percent), and higher sales in the petroleum, coal and wood products industries.

Europe: A lack of new unsettling surprises coming out of the Eurozone, the markets’ attention on the U.S. fiscal cliff, and somewhat improved German business sentiment allowed the euro to gain its strongest position since April against the dollar.

Japan: The yen fell against the dollar for a third month, to its weakest level since September 2010. A number of factors contributed to the yen’s depreciation, such as growing pessimism among manufacturers (fueled by reports of a larger-than-expected drop in November’s industrial production), promises by incoming prime minister Shinzo Abe to “beat deflation” with public works spending and “unlimited” monetary stimulus, and another 10 trillion yen in easing by the Bank of Japan.

China: Although we do not yet report the yuan/renminbi’s performance against the dollar, we nonetheless track developments in that country. For example, China’s manufacturing data showed further improvement in December, with HSBC’s flash PMI rising to a 14-month high of 50.9 -- meaning manufacturing expanded very slightly. Some internal details (e.g., a drop in new export orders) suggested caution is in order, though. How much of the apparent ongoing economic improvement is truly organic instead of the result of stimulus continues to be debated. For example, a Bloomberg Brief note suggests the latter as the real impetus. "Growth in China, which is currently being supported by government fiscal stimulus targeting infrastructure investment, will probably remain between 7.5 and 8 percent. This will buy time for the new leadership to continue with reforms, including interest-rate liberalization, designed to help stoke final demand in China and properly rebalance the nation's economy."

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.