The Dollar Takes Flight

  • March 15, 2001
  • Marc Dupee

June dollar index futures
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consecutive day to a three-month high as traders scrambled to get into the
currency that, at least in the short-run, appeared to provide the greatest
margin of safety in an uncertain global economic environment. 

Japan is the focal point. A slew of reports pointing to
extreme weakness in the Japanese yen
(
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yesterday after a credit rating agency downgraded 19 banks. In response, finance
officials in Tokyo implied they would carry through with a widely expected
return to a zero interest rate monetary policy in an attempt to keep the
economy from contracting and deflating. 

Additionally, a Japanese newswire story reported that a
Bank of Japan official made statements suggesting that the central bank would
target reserve requirements. Banks with lower reserve requirements have more
money to lend. Investment and a renewal of spending are precursors to an
economic recovery. Still, lowered reserve requirements heighten the risk of
default among lending banks, and part of the structural problems plaguing
Japanese banks are bad loans that have not been taken off the books. The yen
closed .0095 lower at .8270.

The failure of the European Central Bank (ECB) to lower
interest rates also helped the dollar advance. Economic weakness in the US is
expected to bleed over into continental economies and many currency traders
believe the ECB is behind the curve in taking proactive action to stimulate
growth (and the additional slowdown that is expected due to the foot-and-mouth
disease outbreak in British and European cattle herds). The
euro FX futures
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Low yesterday, a sign of weakness, and fell .00920 to .90100.
Swiss francs
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and .0064, respectively. 

June dollar index futures
(
DXM1 |
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PowerRating), from the Momentum-5
List, closed 1.00 higher at 114.87.

June Nikkei 225
(
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PowerRating) jumped 6% off lows on the
suggestion that the Japanese government might buy back stock, many of which are
trading at 16-year lows. The rally in the major Japanese stock average worked to
boost US equity futures. S&P futures
(
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at 186.0 and

Dow futures
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relief gap up, Nasdaq 100 futures
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near a contract low, down 58.00 at 1717.00.

Amid the focus on a potential global economic slowdown,
traders priced in bets that the Fed will have to be more aggressive in cutting
interest rates to stave off a worldwide house of falling cards. April federal
funds futures priced in as high as an 84% chance of a 75-basis-point move for
next week’s meeting. June Federal Funds futures
(
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PowerRating) leapt again to a
contract high and are pricing in as much as an 88% chance of a 100-basis-point
(1%) rate cut by the Fed’s June meeting. The Fed here is being viewed as the
institution of last resort in re-stimulating the US and world economy. A
stronger US economy would help Japan export its way to economic recovery. 

Front page lead stories in both the Los Angeles Times and New York Times
about foot-and-mouth disease in the UK and Europe is continuing to keep the
buying pressure on in the pigs. Pigs are the leading contracts on the Momentum-5
Lis. April lean hogs
(
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PowerRating) closed .850 higher at 65.675 and May pork bellies
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closed just below limit-up levels, up 2.975 at 88.500.

May wheat
(
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tumbled after an electronic glitch on the CBOT that forced a late opening. After
the 11:15 start, wheat and corn fell 10 and 7 cents respectively on the view
that slaughtered animals on the other side of the Atlantic will reduce demand
for grain feed exports.

A pattern pointed out in previous “Futures Markets”
Commentaries, cocoa
(
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PowerRating) gapped down out of the right shoulder of
a head-and-shoulders top and traded lower to close down 25 at 1015.