dollar has depreciated sharply

8/8/2019 Dollar Has Depreciated Sharply

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How can we explain the fact that the dollar has depreciated sharply since the

summer of 2010, while the long-term interest rate on Treasuries has continuedto fall?

If there were pronounced financial market mistrusttowards the United States (due to the prospects for publicfinances, continued deleveraging, household insolvency,stagnation in construction and consumption, inability toreduce unemployment, useless excess corporate savings,deindustrialisation and external deficit, etc.), there should beboth a depreciation of the dollar and a rise in long-terminterest rates on the public debt, as investors would stopbuying dollars .

But since the summer of 2010, there has been a differentconfiguration: a depreciation of the dollar, but a fall in long-term interest rates.

This shows us that investors do not react to a concernabout the economic and financial situation in the UnitedStates, but to the prospect of very marked growth inliquidity (in the money supply) in the United States : it hasled to both purchases of Treasury bonds (carry on the yieldcurve), which has driven down long-term interest rates, andshort-term capital outflows attracted by higher returns inthe rest of the world , which has depreciated the dollar.

1- Investors could be very concerned about the UnitedStates

Investors could be very worried about the economic andfinancial situation in the United States , due to:

the deterioration in public finances (Charts 1Aand B, Table 1 in the Appendix);

Chart 1AUnited States : Public debt fore casts

(as % of GDP)

20

40

60

80

100

120

140

160

00 02 04 06 08 10 12 14 16 18 20 22 24 26 28 3020

40

60

80

100

120

140

160

Sources: Datastream, CBO, Nati xis

Chart 1B

United States: Fiscal deficit (as % of GDP)

-12

-10

-8

-6

-4

-2

0

02 03 04 05 06 07 08 09 10 11 12-12

-10

-8

-6

-4

-2

0

United States (ex equity transactions)

United States*

Sources: Datastr eam, Nati xis f orecasts

(*) Federal government's borrowingrequirement (incl. equity t ransacti ons)

continued deleveraging (Chart 2A) , linked to theexcess debt relative to wealth (Chart 2B) ;


2/6N 193 14 octobre 2010 I 2

Chart 2AUnited States : Loans to hous eholds and

companies (Y/Y as %)

-15

-10

-5

0

5

10

15

20

02 03 04 05 06 07 08 09 10-15

-10

-5

0

5

10

15

20HouseholdsCompanies

Sources: Datastream, FoF, N atixis

Chart 2B

United States: Household de bt-to-financial andproperty w ealth and corporate debt-to-market

capitalisation ratios (as %)

10

20

30

40

50

60

70

02 03 04 05 06 07 08 09 1010

20

30

40

50

60

70Ratio: Household debt-to-financial and property wealth ratioRatio: Corpor ate debt-to- market capitalisation ratio

Sources: Datastr eam, FoF, FIBV, Nati xis

insolvency among many indebted households(Chart 3A), which explains the stagnation inresidential investment (Chart 3B) andconsumption;

Chart 3AUnited States : House hold default rate and

number of foreclosures

4

5

6

7

8

9

10

11

02 03 04 05 06 07 08 09 100

50

100

150

200

250

300

350

400Household d efault rate (mort gages, LH scale)

Foreclosures (i n thousands p er month, RH scale)

Sources: Datastream, BLS, Nati xis

Chart 3BUnited States : Retail sales and housing start s

0

300

600

900

1,200

1,500

1,800

2,100

2,400

02 03 04 05 06 07 08 09 10-4

-3

-2

-1

0

1

2

3

4

Housing st arts (t housands per year, LH scale)Retail s ales (M /M change as %, RH scale)

Sources: Datastr eam, BEA , Natixis

the inability to reduce unemployment (Chart

4A), due to the weak job creation and the recentilliquidity in the residential property market (Chart4B);

Chart 4AUnited States: Unemployment rate and number of

wage e arners in involuntary part-time w ork

3

4

5

6

7

8

9

10

11

02 03 04 05 06 07 08 09 10

3

4

5

6

7

8

9

10

11

Unemployment rate

Number of wage earners in involuntarypart-time work (in millions o f persons)

Sources: Datastream, B LS, Nat ixis

Chart 4B

United States: Monthly change in employmentand time needed to s ell a house

2

4

6

8

10

12

14

16

02 03 04 05 06 07 08 09 10-800

-600

-400

-200

0

200

400

600Average time needed to sell a house (number of months, LH scale)M onthly change in emplo yment (t housands of persons, RH scale)

Sources: Datastream, Natixi s

useless excess corporate savings , as thedistortion of income sharing to the detriment of employees has led to a uselessly high self-financing rate (profits-to-investment ratio) ( Charts5A and B);


3/6N 193 14 octobre 2010 I 3

Chart 5AUnited States : Per capita productivity and w age

(Y/Y as%)

-4

-2

0

2

4

6

8

02 03 04 05 06 07 08 09 10-4

-2

0

2

4

6

8Per capita prod uctivityReal per capita wage (deflated by GDP deflator, incl. benefits)

Sources: Datastream, B LS, Natixis

Chart 5B

United States: Self-financing rate

70

80

90

100

110

120

02 03 04 05 06 07 08 09 1070

80

90

100

110

120

Sources: Datastr eam, BEA, Nat ixis

deindustrialisation (Chart 6A) and a persistentlyvery high external deficit (Chart 6B) .

Chart 6AUnited States : Manufacturing s ector

em ployment and output (1998:1 = 100)

707580859095

100105110115120125

02 03 04 05 06 07 08 09 10707580859095

100105110115120125

EmploymentM anufacturing output

Sources: Datastream, BLS, Fed, Nat ixis

Chart 6BUnited States: Trade balance

(in USD bn per year)

-900

-800

-700

-600

-500

-400

-300

-200

-100

0

02 03 04 05 06 07 08 09 10-900

-800

-700

-600

-500

-400

-300

-200

-100

0

Sources: Datast ream, Census, Nati xis

We would therefore understand it if investors were

extremely pessimistic about the United States.

2- But there is an incoherence between the exchangerate and the long-term interest rate

If investors were very pessimistic about the UnitedStates, there should be a sell-off in all dollar-denominated assets, and hence a depreciation of thedollar and a rise in long-term interest rates in the UnitedStates.

Since the summer of 2010:

the dollar has definitely depreciated (Chart 7A) ;

but dollar interest rates continue to decline (Chart 7B).

there is no across-the-board mistrust towards the UnitedStates.

Chart 7AExchange rates

80

90

100

110

120

130

140

02 03 04 05 06 07 08 09 100.8

1.0

1.2

1.4

1.61.8

2.0

2.2JPY/ USD (LH scale) USD/EUR (RH scale)USD/GB P (RH scale)

Sources: Datastream, Nati xis


4/6N 193 14 octobre 2010 I 4

Chart 7BUnited States: Interest rates

0

1

2

3

4

5

6

02 03 04 05 06 07 08 09 100

1

2

3

4

5

62-year interest rate 10-year interest rate30-year interest rate

Sources: Datastream, Natixi s

3- So we are looking at excess liquidity in the United

States and not a widespread mistrust towards theUnited States

If there were mistrust towards the United States (whichwould be legitimate, for all the reasons seen above), there would have been both a depreciation of the dollar and arise in dollar long-term interest rates since the summer of 2010.

Now, there is a depreciation of the dollar, but not a fall inlong-term interest rates.

This means that the cause of the developments :

is not mistrust towards the United States, whichwould have stopped the purchases of Treasuries(Chart 8) ;

but an expectation of huge additional liquiditysupplied by the Federal Reserve, due to thevery likely new cycle of quantitative easing , ontop of that already implemented in 2008 (Chart 9) .

Chart 8United States: Net purchases of Treasuries

(as % of GDP)

-4

-2

0

2

4

6

8

02 03 04 05 06 07 08 09 10-4

-2

0

2

4

6

8By institutional investo rsBy non-residents

By banks

Sources: Datastream, FoF, Nat ixis

Chart 9United States : Monetary base ( USD bn)

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

02 03 04 05 06 07 08 09 10500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

Sources: Datastream, Fed, Nati xis

The excess liquidity clearly explains the situation

observed: ease of setting up carry trades in Treasuries,

which drives down long-term interest rates;

short-term capital outflows looking for higher returns in emerging countries (Chart 10) , whichexplains the weakness of the dollar.

Chart 103-month interest rate

0

2

4

6

8

10

12

02 03 04 05 06 07 08 09 100

2

4

6

8

10

12United States

Emerging count ries as a whole ex Russia and OPEC

Sources: Datastream, Nati xis


5/6N 193 14 octobre 2010 I 5

Appendix

Table 1Total FY2010 Budget Gaps

State FY2010 totalTotal gap as percent

of FY2010 GeneralFund

Source of gap estimates

California* 45.5 52.8 Governors budget, Legislative Analysts Office, Dept of Finance, Controller New York 21 38.8 Division of BudgetIllinois 14.3 43.7 State budget/Voices for Illinois Children analysisNew Jersey 11 40.0 Governors office/ FY12 Treasurer Washington* 6.2 27.9 Governors Budget/WA Budget and Policy Center/FY12 OFM Six Year OutlookFlorida 6 28.5 Revenue Estimating ConferencePennsylvania 5.9 23.6 Governors office/ Budget Director Massachusetts 5.6 20.4 FY12 Governors Budget/ FY11 MA Budget & Policy Center Arizona 5.1 65.0 Joint Legislative Budget Committee, Financial Advisory CommitteeNorth Carolina 5 26.2 North Carolina Fiscal Research Division/ FY12 NC Budget and Tax Center Connecticut 4.7 27.0 CT Voices for Children analysis of Office of Fiscal Analysis data/ Comptroller Georgia 4.5 28.8 State budget, Georgia State University/ FY11: Georgia Budget and Policy InstituteOregon* 4.2 32.4 Jt. Committee on Ways & Means/May Revenue Forecast/ FY12 OR Reset ReportOhio 3.6 13.9 Office of Budget and Management/ FY12 Community SolutionsVirginia 3.6 24.1 House Appropriations/Governors office

Texas 3.5 10.7 Center on Public Policy P riorities analysis of Legislative Budget Board, Comptroller andHHS Commission data.Minnesota 3.4 22.7 Management and Budget forecastMichigan 3.3 15.8 Consensus Revenue Forecast, Senate Fiscal AgencyWisconsin 3.2 23.7 Legislative Fiscal BureauMaryland 2.8 20.3 Department of Legislative Services/ State Board of Rev EstimatesLouisiana 2.5 27.8 Revenue Estimating Conference/Governors budget

Notes: * Californias mid-year gap is included in the total shown for FY11 in Table 1.Oregon and Washington have two-year budgets. For Oregon, the size of the combined shortfall before budget adoption for FY10 and FY11 is shown here.


6/6N 193 14 octobre 2010 I 6

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dollar has depreciated sharply

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