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Two major, but opposing, forces pivoting off the U.S. dollar developed in the FOREX markets during 1999: the Japanese yen’s strength against the dollar, and the weakness of the new Euro currency against the dollar and yen. Of the two, the Euro’s slide may be the more important. Europe’s single 11-nation basket currency, which began trading in January 1999 with a value of about $1.17 to the dollar, fell steadily during the first half of the year but was able to establish a footing, albeit short lived, at just above parity with the dollar. The root cause of the slide was the remarkable strength of the U.S. economy which showed an annualized third-quarter growth rate of 5.5 percent vs. 2 percent growth among the Euro-zone nations. In economic terms, the Euro’s decline could prove to have little short term effect, however, the psychological impact could have longer term implications because it implied shaky confidence in either the Euro or Europe’s ability to achieve sustained growth. Moreover, should the Euro’s weakness persist deep into 2000 it might (1) stroke inflationary fears and cause the European Central bank to tighten monetary policy which could slow some European economies, and (2) politically, it might harden the resistance of countries who have so far refused to adopt the Euro, including the United Kingdom. The European Union forecasts annualized growth of 3 percent in the next few years which is above their estimates for U.S. economic growth.

Trading in the world’s currencies expanded rapidly during the 1990’s, reaching by decade’s end almost $2 trillion per day. Most of the trading is via electronic transfers for central banks and commercial banks, but a small portion of the trading is on organized exchanges where intraday price swings often have speculative based roots that can exaggerate short-term movements. However, the U.S. dollar is the fulcrum from which the long-term market value of many currencies is determined. The U.S. economy’s strength, and benign inflation, was a magnet for foreign capital, especially during the second half of the 1990’s, notwithstanding the fact that in 1999 the Asian and Latin American economic problems lost some of the uncertainties that had triggered a flight to the dollar in 1998.

In mid-1999 the yen was trading around 120 yen to the U.S. dollar, towards yearend it was near 100 yen per dollar, a level not seen since 1995. Despite the yen’s rise, Japan’s economic problems still run deep. The success of 1999’s new government monetary and fiscal policies remains uncertain. The Japanese economy stagnated during much of the 1990’s, and at the decade’s end Japanese bank officials still appeared in limbo about setting policy in an era of deflation. It was rumored that the Bank of Japan would print more yen in 1999 to help pull the nation out of its slump and check the yen’s rise, but it apparently never happened. The yen’s strength would suggest a tight monetary policy, but at yearend 1999 Japan’s key interest rates were still within an eyelash of zero. However, the yen’s rise partially reflected prospects of higher interest rates because of heavy borrowing the government must take to stimulate growth. The flip side is that a strong yen may dampen exports and possibly reverse the economy’s recovery by 2001.

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The Canadian dollar also firmed against the U.S. dollar in 1999, trading at yearend near $0.68 vs. $0.64 a year earlier. The rise partially reflected a perception that the currency was severely undervalued following the Asian economic crisis in 1997 that cut deeply into Canada’s exports. In 1999, with the crisis largely gone, both Canada’s exports and currency did indeed improve.

The British pound strengthened against the U.S. dollar midyear, with the move carrying from about $1.55 to over $1.65 by October, before some of the gain was pared towards yearend. A rise in key short-term interest rates, the first in more than a year, helped kick the pound’s value higher.

The Finex U.S. Dollar Index moved higher during the first half of 1999, nearly reaching 105.00 vs. the January level of 94.00. Towards yearend the index was trading near 102.00. The dollar’s outlook for 2000 looks promising. The U.S. economy’s strong growth rate is apt to slow but still prove at least on a par with most of the world’s key economies, even if the Federal Reserve continues to raise interest rates as they did in 1999.

Futures Markets The Chicago Mercantile’s International Monetary Market (IMM) trades futures and options on the British pound, Duetsche mark, Swiss franc, Japanese yen, the Canadian, Australian and New Zealand dollars, Mexican Peso, French franc, Brazilian real, South African Rand, the Euro FX and the Russian Ruble. Chicago’s MidAmerica Exchange (MidAm) trades smaller futures contracts on many of the IMM’s currencies. The FINEX division of the New York Cotton Exchange (NYCE) trades futures and options on a composite dollar index and also offers crossrate contracts: D-mark/J-yen, D-mark/French Franc and D-Mark/B-pound.

Excerpted from the CRB Commodity Yearbook.