Currency marketplace watchers generally concentrate their attention on important cross rate relationships such as the US dollar against the Euro FX, Canadian dollar, Japanese Yen, or Chinese renminbi. However, broad real currency indices (trade-weighted or effective exchange rate) offer greater insight regarding the actual overall strength (or weakness) of any given currency than does a particular cross rate. Thus the broad real trade-weighted dollar is a more comprehensive benchmark for “the dollar in general” and its relationship with debt, stock, commodity, and other arenas.
As the Goldilocks Era faded and the dreadful worldwide economic disaster of 2007-09 unfolded, not only did US Treasury yields collapse alongside massive falls in the S+P 500, emerging marketplace equities, and commodities. During the darkest times of that global financial crisis, the broad real US dollar, Japanese Yen, and Chinese renminbi all appreciated sharply.
Though the renminbi has advanced relative to the dollar since around late April 2014, the broad real (effective exchange rate) yardsticks for both the renminbi and the dollar have rallied together (moved upwards) in recent months (since around mid-2014). In contrast to these bull moves in broad real exchange rates for the renminbi and the dollar, Japan’s real effective exchange rate weakened further in recent months. Moreover, despite the Yen’s depreciation, this simultaneous recent strength in both the dollar and the renminbi overlaps with (confirms) declines in UST 10 year yields and slumps in emerging marketplace stocks and commodities. In this context, in a world of interrelated marketplace battlefields, and given the increasing importance of China in the international economy, the hand-in-hand (joint) rally in the broad real dollar and renminbi indices also warns that a notable top in the S+P 500 may soon emerge.
The recent declines in the Yen and the Euro FX probably hint that the worldwide economy is weakening, not strengthening. Note too the indications of a slowdown in China’s enviable GDP growth rate. In this context, dramatic falls in currencies such as the Russian ruble also can signal or spark potentially more widespread weakness.
The upward trends in the broad real trade-weighted dollar and the renminbi real effective exchange rates probably will continue. For the near term, the Yen’s effective exchange rate probably will remain relatively weak. However, if the world economic situation worsens significantly relative to the current scene, since the Yen appreciated very sharply during the 2007-2009 crisis, the Yen may depart from its current bearish path and venture somewhat higher.
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Currency Contexts- Recent Rallies in the Dollar and Renminbi (11-9-14)
Chart- Chinese Renminbi (11-9-14, for essay Currency Contexts)