January 2013 Currency Exchange Rates

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In January the U.S. dollar depreciated by 1.0 percent (monthly average basis) against the euro, held steady relative to Canada’s loonie, and appreciated by 5.8 percent against the yen. On a trade-weighted index basis, the dollar weakened by 0.1 percent against a basket of 26 currencies. 

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Canada: The loonie held its ground against the greenback as the influence of real GDP growth (+0.3 percent) in November -- thanks primarily to manufacturing and mining, quarrying and oil and gas extraction -- was offset by a concurrent near-quadrupling of Canada’s trade deficit (to C$2 billion).

Europe: The currency markets were apparently convinced the Eurozone fiscal crisis is over by news that banks were starting to repay the emergency funding they received from the European Central Bank a year ago. That complacency seems misplaced, however, since the repayments (€3.5 billion) were less than 2 percent of what was expected (€220 billion).

Japan: Although industrial production figures for December may suggest Japan’s economy is pulling out of its latest downturn, the widening trade deficit justifies caution with such an interpretation. Moreover, market reactions to the fiscal and currency policies being executed by both the Japanese government and central bank contributed to the yen’s weakening during January.

China: Official 4Q2012 estimates showed the world’s second-largest economy grew by 7.9 percent, confirming -- at least in the mind of IHS Global Insight senior economist Xianfang Ren -- “that the worst is probably over for the economy and that China has avoided a hard landing.” The staff at Agora Financial share our skepticism; they reminded readers that Chinese politicians have admitted their country’s economic numbers are “manmade” and “for reference only.”

Looking forward, quantitative easing and other unorthodox measures that central banks are implementing -- despite earlier pledges not to undertake competitive currency devaluations -- threaten to set off currency wars. A surge in goods prices is among the more benign potential consequences of such actions.

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.