Sunday, October 04, 2009

U.S. Dollar: Spot Rates and Forward Rates

ISTANBUL -- Finance ministers from the Group of Seven rich countries face concerns over the future of the U.S. dollar as they meet Saturday in a forum whose role is increasingly in question. the finance ministers, who will be joined by their central bankers, have a number of issues to discuss as the world economy begins a slow recovery from the deepest recession since World War II.

Chief among these is likely to be the dollar, which has been falling in foreign exchange markets in recent weeks and months. In recent days, it sank to an eight month low against the yen, which nearly hit a year-high against the dollar, prompting concerns that a dollar crisis could bring the world recovery to a grinding halt.


MP: The chart above shows the current spot rates and one-year forward rates for the US dollar versus 16 major currencies (see full list of ex-rate quotes here). According to the one-year forward rates, the U.S. dollar is selling at a one-year forward premium versus all of the currencies listed except the Swedish krona and Swiss franc, and is even selling at a slight 0.10% premium against both the pound and euro.

Update: Thanks to Morganovich and HappyJuggler0 for pointing out that we can't necessarily use forward ex-rates to accurately infer anything about the future value of the dollar. I've re-titled the post and removed my comments about the stability of the U.S. dollar. Mea cupla.

8 Comments:

At 10/04/2009 9:48 PM, Anonymous Anonymous said...

I wonder why all those exporting countries want us to have a strong dollar?

 
At 10/05/2009 2:54 AM, Anonymous richard said...

Mark,

I don't understand. The % value for the Euro and the Pound should be negative.

 
At 10/05/2009 2:56 AM, Anonymous richard said...

Sorry, my mistake.

Euro/US$ or US$/euro: Mixup in my head.

Feel free to delete these comments.

 
At 10/05/2009 9:43 AM, Anonymous morganovich said...

mark-

your interpretation of this data is a common misconception.

this is purely a carry trade issue. the forwards markets in currencies are deep and efficient enough that they do not carry meaningful information about forex cross projections.

they are based purely on interest rates.

dealers want to lend low interest rate dollars (and hold higher yielding currencies)badly enough that they will actually subsidize it somewhat. the efficiency of the market takes out the ability to make this arbitrage.

forwards (at the dealer level) are hedged transactions. delta of the underlying cross is irrelevant and forwards pricing contains no meaningful signal about exchange rate expectations.

all this is telling you is that most countries have higher interest rates than we do.

 
At 10/05/2009 10:19 AM, Anonymous gettingrational said...

It is mind boggling that the third biggest economy in the world does not have a world market for its currency.

 
At 10/05/2009 10:52 AM, Blogger Gordon said...

I don't believe the charted data is valid when costs of manufactured items and commodity resources are considered.

The chart only seems to compare relative values of fiat currencies, which are all sinking together, some slower/faster than others.

The data is meaningless when compared to non-fiat items needed to maintain both countries and households.

Gordon

 
At 10/05/2009 11:36 AM, Blogger happyjuggler0 said...

Mark,

Some constructive criticism, but first I want to say that I love your site. You cover positive things that the proverbial "everyone" else seems to want to ignore for whatever reason, and for that Carpe Diem is a gem. However every once in a while you make a howler of a mistake, and this is one of those times.

Morganovich is absolutely correct. The one year forward price of a currency is the current currency value times the respective one year interest rate for those currencies.

If the one year forward was anything else, then arbitrageurs would jump all over that discrepancy and earn a free lunch. In fact, it is precisely because arbs are keeping it in check that the forward currency quotes contain zero predictive power regarding what the FX rates will be in the future.

As Morganovich points out, this is a common mistake. Don't feel too bad.

 
At 10/05/2009 1:44 PM, Blogger Mark J. Perry said...

I'll defer to Morganovich and HappyJuggler0 on this one, and I have revised my post according to the comments they have shared.

 

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