Société Générale head of foreign exchange research Kit Juckes on the US dollar dynamic, QE 3, 4, and 5, "even lower rates for even longer than you thought," and the Bank of Japan slowly learning to match policies with the Fed:
In the US meanwhile, the economy is growing, albeit slowly, and the 'fiscal cliff' looms on the political horizon. The fact that we talk about the fiscal cliff at all, tells us something about US politics and policy options.
The Treasury issues debt at obscenely low cost and in as much quantity as it wants to the world's fearful investors. The exorbitant privilege of owning the world's dominant reserve currency has never been more in evidence. Yet party politics means that increasing the debt ceiling will be tortuous, significant fiscal tightening, simply as a result of temporary accommodation rolling out, a real risk.
This is a risk politicians can afford to take because they think the Bernanke Fed will bail them out. QE 3, 4 and 5 are in the pipe. And that is why the dollar is a structurally weak currency. Issuing vast amounts of debt at negative real yields and daring the rest of the world to sell the dollar is the chosen policy. Because Europe will be another drag on global growth and a support for the dollar, the upshot is even lower rates for even longer than you thought.
US policy determines the dominant capital flow driving currency markets - yield-hungry money flows out of dollars, returning sporadically as investors fear that their principle is at risk in a dangerous global economy. Faced with this, emerging markets lurch from rally to correction, but will continue over time to see more rallies than corrections.
The yen remains stronger than anyone thinks is good for it, but weakness relies on the BOJ and MOF matching Fed policies and this is something they are only learning to do very slowly. And the euro can only fall when the crisis enveloping it is at its most intense. To get from 1.32 to 1.24 in a month we needed record speculative shorts, talk of shifts out of euros by central bank reserve managers, and the threat of banking crisis in Spain and political chaos in Greece.
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