Currency havens are disappearing as Switzerland and Japan intervene in foreign-exchange markets, while U.S. and European debt loads undermine credit ratings.
The biggest beneficiaries in the $4 trillion-a-day currency market may be Norway’s krone and the Australia and New Zealand dollars, according to Frankfurt Trust, which oversees about $23 billion. All have debt that is less than 48 percent of gross domestic product, compared with about 60 percent in the U.S., 77 percent in the U.K. and 79 percent in Germany, according to data compiled by Bloomberg.
The Swiss franc and Japanese yen, which had become favorites of traders skittish about holding dollars and euros, became perilous after the Swiss National Bank unexpectedly cut interest rates and Japan sold its currency. The yen weakened as much as 3.2 percent on Aug. 4, according to Bloomberg Correlation-Weighted Indexes. The U.S. came within days of defaulting and Italian and Spanish bond yields approached levels that spurred bailouts of Greece and Ireland.
“You want to stay away from the euro and dollar because this is really an ugly pair and there are alternatives,” Christoph Kind, the head of asset allocation in Frankfurt at Frankfurt Trust, said in a telephone interview last week. “I like currencies like the Australian and New Zealand dollars, the Swedish krona and the Norwegian krone. They are AAA-rated countries with a currency they can manage and handle, and they have pretty liquid markets.”
Standard & Poor’s downgraded the U.S.’s AAA credit rating for the first time on Aug. 5, lowering the ranking to AA+. The company kept the outlook at “negative,” saying it was becoming less confident that Congress will end Bush-era tax cuts or tackle entitlements.
Even after the biggest declines in more than a year last week, the New Zealand and Australian dollars are the only currencies besides the franc that rose in the past 12 months among 10 major peers tracked by the Bloomberg indexes. The kiwi, as New Zealand’s currency is known, climbed 3 percent in the period, with the so-called Aussie up 2.8 percent, the indexes show. The franc surged 27 percent.
New Zealand’s dollar depreciated 1.7 percent to 82.89 U.S. cents as of 10 a.m. in London, adding to last week’s 4.1 percent drop. The Aussie declined 0.8 percent to $1.0358 after tumbling 5 percent in the five days to Aug. 5. Those were the biggest weekly drops for both since at least May 2010.
Australia and New Zealand have profited from commodity demand from China, whose economy grew 9.5 percent last quarter from a year earlier. China accounts for 25 percent of Australia’s exports, with Asia taking more than 70 percent, Reserve Bank of Australia Governor Glenn Stevens said in New York on April 13. Overseas sales of products such as wool, lumber and milk account for about 30 percent of New Zealand’s economy.
Estimates for Australia’s dollar versus the greenback have climbed 9.4 percent this year, according to data compiled by Bloomberg. Expectations for New Zealand’s dollar have increased 9.3 percent since the end of December.
Norway had the biggest government surplus of any AAA-rated country last year at 10.5 percent of gross domestic product, according to Fitch Ratings. The nation is the world’s seventh-largest oil exporter. Analysts have raised their fourth-quarter predictions for Norway’s krone against the dollar by more than 15 percent, Bloomberg data show. Forecasts for the Swiss franc have increased more than 20 percent.
The krone weakened 1.8 percent last week and was little changed at 5.4717 per dollar today. It slipped 0.4 percent against the euro to 7.8481. The Norwegian currency is 1.3 percent lower in the past year versus its developed-market counterparts, the correlation-weighted indexes show.
The yen weakened as much as 4.1 percent against the dollar on Aug. 4, the most since October 2008, after the Bank of Japan intervened to protect the nation’s economic recovery. Japan acted as the yen approached its post World War II high of 76.25 to the dollar, reached on March 17 in the aftermath of the nation’s biggest-ever earthquake that spawned a deadly tsunami and nuclear disaster. The yen dropped 2.1 percent last week to 78.40 and traded at 77.76 today.
Japan may have spent a record amount intervening to stem the yen’s gains, based on projections of deposits held by financial institutions at the Bank of Japan. The central bank estimated that deposits climbed to a total 32.3 trillion yen ($414 billion), it said in a statement on Aug. 5 in Tokyo. The figure suggests the government sold about 4.5 trillion yen, a record, according to Yuichi Takahashi, market economist at Totan Research Co., a money-market brokerage in Tokyo.
A day before Japan acted, the franc fell 1.9 percent versus the euro as the SNB lowered its benchmark rate to “as close to zero as possible” from 0.25 percent.
The Zurich-based bank was countering gains that have pushed the franc up about 37 percent against the dollar and 27 percent versus the euro in the past year. The franc still strengthened about 3.2 percent against the euro to 1.09541 last week and traded today at 1.0902.
“Intervention is becoming a bigger trend,” said Geoffrey Yu, a foreign-exchange strategist at UBS AG in London. “It’s a trend that is going to continue unless we see a massive reversal in market moves, which doesn’t look likely.”
Moment of ‘Stress’
South American finance officials, struggling to keep the two-year decline of the U.S. dollar from hurting their economies, are seeking to agree on a coordinated response. Foreign investment inflows that quadrupled since 2003 may accelerate amid concern that recoveries in the U.S. and Europe are faltering and may force the Federal Reserve to begin another round of asset purchases.
This is a moment of “stress,” Brazilian Finance Minister Guido Mantega told reporters in Lima on Aug. 5. “We have to be united to create mechanisms of protection in response to this situation.” Last year, he said the U.S., Japan and Europe were sparking a global “currency war” with near-zero interest rates.
Currencies such as the Aussie, the krone and the kiwi won’t avoid a “real scare,” said Firas Askari, the head currency trader in Toronto at Bank of Montreal.
The MSCI World Index of stocks sank 8.6 percent last week amid concern the U.S. economy may slip into a recession and as Europe’s fiscal crisis roiled markets in Italy and Spain, sending the nations’ bond yields toward 6.5 percent and euro-era records last week.
The euro fell 1.6 percent against the dollar on Aug. 4 after European Central Bank President Jean-Claude Trichet kept the main rate at 1.50 percent and said policy makers resumed bond purchases following an 18-week hiatus. He also said policy makers would offer banks more cash to keep debt-crisis contagion from engulfing Italy and Spain.
It gained for a second day today after the ECB signaled it’s ready to start buying Italian and Spanish bonds to tame the sovereign-debt crisis. In a statement issued in the name of the ECB president after an emergency Governing Council conference call last night, the Frankfurt-based central bank said it will “actively implement” its bond-purchase program.
The 17-nation European currency has dropped 2.2 percent in the past year amid credit-ranking downgrades into so-called junk status of nations including Greece and Portugal.
The dollar fell 10 percent in the past year, the worst performer as measured by the Bloomberg Correlation-Weighted Indexes, as the U.S. recovery faltered and concern mounted the government would default amid a standoff between President Barack Obama and the House of Representatives over raising the nation’s $14.3 trillion debt limit.
Obama signed a compromise agreement on Aug. 2, the day the Treasury had said the nation’s borrowing authority would expire. In lowering the U.S. rating last week, S&P said it may be cut to AA within two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general-government debt.
“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” New York-based S&P said.
‘Ugly Dog Competition’
Gross domestic product rose at a 1.3 percent annual rate in the second quarter following a 0.4 percent increase in the first three months, the Commerce Department in Washington said on July 29. Harvard University economics professor Martin Feldstein, a member of the Business Cycle Dating Committee of the National Bureau of Economic Research, said he sees a 50 percent chance of another recession.
“It’s a kind of ugly-dog competition and it’s not really that you prefer a currency, it’s just which one is under less pressure at a particular time,” said Frances Hudson, who helps oversee about $257 billion as a global strategist at Standard Life Investments in Edinburgh.
The committee of bond dealers and investors that advises the U.S. Treasury said in quarterly feedback presented to the government, published on Aug. 3, the dollar’s status as the world’s reserve currency “appears to be slipping.”
The Treasury Borrowing Advisory Committee, which includes representatives from firms including Goldman Sachs Group Inc. and Pacific Investment Management Co., said the outperformance of haven currencies and those from emerging nations is debasing the dollar’s status as the world’s reserve currency, according to comments included in the group’s discussion charts.
Reserve Status ‘Slipping’
International Monetary Fund data show the dollar accounted for 60.7 percent of global currency reserves in the first quarter, down from 72.7 percent a decade ago. The euro’s share fell to 26.6 percent from a peak of 27.9 percent in 2009.
A category the Washington-based IMF calls “other currencies,” which strategists say includes the Australian, New Zealand and Canadian dollars soared to 4.7 percent from 1.8 percent at the end of 2007.
“The lack of safe-haven credentials” applies to the dollar and the euro, said Alan Ruskin, the global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG in New York. “That’s what is funnelling us into some very small markets, which are having a very hard time accommodating these flows.”