People who are acquainted with Macro Man, either personally or virtually, will know that he is very rarely lost for words. This morning, however, he has reached that milestone, as he’s watched prices flicker on his screen in slack-jawed silence.
Policymakers often reference a desire to avoid “excessive volatility” and the proper functioning of markets. Suffice to say that that we are now firmly in the presence of the former, with an utter absence of the latter. Regardless of your market view, right or wrong, you want to have a market in which to transact. The past couple of weeks, and the past couple of days in particular, has seen complete implosion of the market’s ability to reflect transaction flows and fundamentals.
This morning, for example, the German ifo survey printed a lower-than-expected 82.6, it’s worst reading since…err…ever. Regardless of what you think about the dollar, it would seem to be an excessive response for EUR/USD to rally 3 big figures in the ensuing hour.
Brad Setser spells it out a little more concretely…..
Only a few days ago, so it seems, it took about $1.25 to buy a euro. Now it takes closer to $1.45 (it was more earlier today, but the dollar subsequently rallied). And — as Macro Man notes — the dollar’s move pales relative to the recent slide in the pound. Not so long ago a pound bought 1.5 euros. Now it buys a euro and change. The Anglo-Saxon currencies haven’t had a good two week run.
Both the US and the UK had housing and finance centric economies. Both have significant external deficits. And both are inclined to use monetary and fiscal policy aggressively to combat a downturn.
Maybe this has something to do with the Fed telling everyone who will listen that they are going to print dollars until all their problems go away.
Macro Man argues other wise. He points out that Euro moved high against everything so he does not think that this move should be considered some kind of reaction against the dollar.
But a good part of the dollar’s recent strength has been the desire for a safe haven. Maybe a lot of people decided they wanted a new safe haven. I don’t see why that would not drive the Euro up against everything