After dropping below 108 yen in mid-January, the dollar fell below 106 yen briefly, but has mostly bounced around in… … a two to three pip range for the past three to four weeks. Two days ago, the dollar touched 106.33 yen before its strong two pip move up to its overnight high.

As has been common with the yen carry trade for some time (borrowing of cheap interest yen to buy higher interest earning currencies), currency rate moves tend to follow global equity movement closely. Similar to the dollar-yen, equities markets have fluctuated for most of the last month.

The surge in the dollar against the yen in the last couple days was based on a couple strong stock days lead by some big financial news events. Tuesday, a 30 day foreclosure freeze, and Warren Buffet’s support of bonds sparked equities. President Bush signed the $168 million tax rebate stimulus package Wednesday, ensuring that millions of Americans will receive significant rebate checks as early as May. A surprisingly strong January retail report also offered hope of a possible recession aversion.

The excitement was quickly dashed by Fed Chief Ben Bernanke late Thursday as he suggested economic conditions could be worsening. He also noted that more rate cuts could be necessary to help stimulate the economy. Lately, rate cute speculation has sparked equities, but the negative outlook by Bernanke disappointed a market hoping for better economic conditions.

The dollars relative strength against the yen may be short-lived. Many economists and currency speculators believe the current move is mostly driven by short investors getting out of their positions with the equity rise, not new buying interest in the dollar.

Some forecasts have suggested the dollar could sink to a value of 100 yen within a matter of months, assuming US equities have another slide lower. Such a move seems highly likely given Bernanke’s comments, and the lack of a strong catalyst lifting the market. If the dollar does drop below 100 yen, it would be one of several big figure moves involving the dollar in the last several months.

One British Pound fetched more than $2.00 for several months in late 2007 and early 2008, before recently dropping back below. The US dollar just recently dropped below one Canadian dollar and has moved back and forth a few times.

Dollar weakness still remains a concern for some Americans and the Bush administration. While dollar weakness does offer some benefits, including interest from foreign investors and shoppers, too much weakness can affect consumer confidence and the value of a buck in the market place.

Many regular consumer products have seen high price points in the last year due to the weak dollar. Dairy products, gasoline, and electronics are just a few of the many products that have seen higher costs tied to the weaker value of the dollar. The problem for consumers is that cost of living income adjustments generally do not keep up with the change in consumer prices. Many Americans receive annual salary adjustments so dramatic dollar drops can make discretionary cash less valuable in the market.

Of course, the $300-1,200 rebate checks (more for couples with children) coming in May should help alleviate some of the budget challenges created by the weak dollar. Interest rate cuts have helped take a bit of the pressure off with lowered variable rate loan, credit card, and other loan costs.

Market Recap

US equities enjoyed another nice move up on Wednesday as hopes of a possible recession aversion made the rounds. A surprisingly strong January retail report got the market excited, leading to a 173 point move up in the Dow. The positive report carried momentum into Thursday morning, as the markets opened up positive. The joy quickly turned sour on comments from Fed Chief Bernanke that the economic problems could be worsening, and more rate cuts might be needed. The market had a late day fall to erase Wednesday’s gains with a 175 point close. The Dow landed at 12,376. The NASDAQ and S&P were down 41 and 18 points, respectively.

Neil Kokemuller
Thursday, February 14, 2008
10:02 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University with a specialization in marketing.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.