Comment
Currencies:
Leveling down.
October 12, 2001
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The significant drop in the Euro against the USD yesterday shows that the process of all economies leveling down has completed one round trip in a vicious reinforcing loop of how economies ever so globally connected to each other is undergoing what economists called synchronous slow down. Day to day currency movements will also attempt to anticipate the painful and sometimes lumpy adjustments that go with such a slow down. Because currencies are valued against each other, they cannot weaken together simultaneously. They reflect synchronous slowdown by taking turns at "weakening against each other". Therefore recent USD strength is not a trend until the bottom of the global economy is completely discounted. When growth accelerates again, if it is also synchronous upturn, then they will take turns "strengthening against each other". But will it be synchronous? Yes, if the global links and inter-dependence are still intact when it occurs. And why should it not be, since a part of the slow down is a cyclical phenomenon. But now currencies are trying to catch each other on the way down. This is inevitable but as senseless as a dog chasing after its own tail. The drivers are never in the currencies themselves, but the macro changes the currencies are trying to discount. Whose turn it is to weaken depends on whom has bad news to announce and how much of it is a surprise. Almost everything shared and published about the latest movements in currencies are short-term themes. The explanations offered although plausible may not be correct as analysts cherry pick a couple of favorites from several potential candidates. After a while, it can be confusing. So what I have suggested here are the larger, longer acting forces that is driving currencies today.
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