What The Bank Of Norway Did Today And Why It Should Interest You
Well, another day and another dollar low against the euro.
The concept of attacking the point of least resistance showed its hand again as the euro
set new highs against the dollar, while the Canadian was unchanged, the
Aussie saw large profit-taking and the yen just barely stayed unchanged. The
dollar moved lower, even as the stock market held its gains and the long-end of
the yield curve continued to rally — so if U.S. growth is strong and U.S. assets
are rallying, why is the dollar so soft? Shouldn’t strong U.S. assets attract
foreign investment?
At this point in time, the
market’s answer can be found in the Bank of Norway. The Bank of Norway
unexpectedly cut interest rates today and the euro/Noki cross rate rallied
dramatically. The Norwegians have been an interesting story all year. In 2002,
the kroner (Norway) was a very strong currency as oil prices were strong
and Norwegian interest rates were hovering around 7%, hence foreign capital
poured in, prompting a strengthening of the kroner. The year 2003 brought a
severe response from the central bank, dropping interest rates down to today’s
rate of 2 ¼% — this has been done to weaken the kroner substantially vs. the
euro. The Norwegians have been very honest about this (unlike the Fed/Treasury)
and summed it up in today’s announcement with the statement: “Inflation is lower
than expected. The aim of monetary policy is higher inflation.â€
The sum result is that a weaker
currency and lower interest will get you inflation — the U.S. has walked this
path and others have followed. It will end only when the Fed moves to raise
rates. But always beware that when the world’s largest debtor wants to create
inflation to relieve its debt burden, it has all the tools at hand. This is what
makes the global financial situation so precarious at this time.
Remember that buying the euro
is the path of least resistance. This will probably stay so until the Europeans
feel some pain and I believe that will probably manifest itself in the DAX
and other indices getting selling pressure. Up until now, all the world indices
have rallied together in spite of dollar weakness — when this begins to change,
it will probably result in some talk of the euro being too strong — but until
then, the path of least resistance holds.