Dollar Slips into Year End

In exceptionally thin conditions that characterize the year-end
markets, a reportedly computer-generated order
lifted the euro from about $1.05 to a little more than $1.0650 in a few minutes
early in the Asian sessions. 
 Before European markets opened the
euro drifted back toward $1.05 where buying re-emerged.   Other European
currencies, like the Swiss franc, and the Scandis tracked the euro.
 Sterling traded higher, though lagged behind the others in the euro
orbit.    The dollar tested the JPY116.00 in early Asia, though, by early European activity, it was
encountering offers above JPY117.00.  
The news stream
is especially light. 
terms of economic data, the only report of note is the preliminary
December CPI from Spain.  It jumped 0.5% on the month for a 1.4%
year-over-year pace.  This is the
fastest pace in a little more than three years.  Recall Spain was still
experiencing deflation (negative CPI readings) as recently as August.  It
may offer investors an inkling of what to expect from the eurozone in early
January when the region’s inflation report is released. The headline CPI is
expected to jump to 1.0% from 0.6%.    It will appear to be largely
an energy story as the core rate is expected to be
little changed from the 0.8%, where it has been since August.  
There are two
other developments that are talking points.
  First, with around three weeks left
in his presidency, Obama cited reports by
the FBI and Homeland Security that linked Russia’s military and civilian
intelligence services to the computer hacking that tried to influence the US
election.  Obama announced sanction against top Russian officials and agencies and expelled 35 Russian operatives.
  He hinted that there were be other measures as well, but did not
specify, leading some to believe the other measures may include its own cyber efforts.    The Russian
ruble is off 1.8% today and is the weakest currency.   Russia’s 10-year
yield is up two basis points.  Of course, the new US President could
reverse these sanctions, but it puts it in an awkward position, especially
given the support showed by Republican
leadership in Congress.  
The other
development is yesterday’s announcement by China that it was nearly doubling
the number of currencies that it will be
included in its reference basket.  
As we noted yesterday, the dollar’s weight
in the basket will be reduced by 4%.  However, we disagree with the media
reports that suggest that this is an attempt by China to reduce the role of the
dollar.   For example, in some media coverage, it is not even reported
that the euro’s weighting was cut by more
than the dollar’s share.   
Given that, the
dollar, euro, yen, and sterling’s weightings were
reduced, while mostly emerging
market currencies were added, including
incidentally, the Saudi riyal, which is pegged
to the dollar, a fairer description may be the China adjusted its basket to
give more weight to the emerging market currencies. 
 The Korean won was given a 10.8% weighting, making it
the fourth most important currency, behind the dollar, euro, and yen.   Proportionately, it is almost half the weight of the US dollar.  One implication
of this adjustment is that if the emerging market currencies weaken next year
as we expect, then Chinese officials can continue to show that although it is
falling against the dollar, it is stable
against is basket.  
This is largely a
public relations and marketing ploy. 
 It has a little substantive impact.  When the PBOC intervenes in the
foreign exchange market, it intervenes primarily against the dollar.  The US and other countries have numerous
measures of the value of their currencies.  The value lies shedding light
on the economic forces and impacts.  However, Chinese officials appear to be using their basket, the way it is said a drunk uses a lamp post, for support, not illumination.  Still, media
reports that do not discuss the changes in the other currency weightings, like
the euro, and instead assert that it is about the reducing the role of the
dollar needlessly and mistakenly serve to confuse the issues and their
In North
America, the only economic report is the Chicago PMI. 
 It is expected to slip to 56.8 from 57.6.  
 Recall that the GM had earlier indicated that it was temporarily closing a few plants due to excess inventory.
 The national ISM report is due on January 3,
and the Bloomberg median forecast is for a small gain.  

In other market
developments, the Asian equities mostly moved higher, with the MSCI
Asia-Pacific Index rising 0.7%.
  It is the third day of small gains.
 It snapped a two-week decline. European
shares are heavier.  The Dow Jones Stoxx 600 is off about 0.3%.
 The second day of losses is sufficient to push the index down on the
week, for the second consecutive declining week.   The S&P 500 needs
to gain about 0.6% of 14 points to avoid
finishing the last week of the year in the red.  

Bond yields
mostly slipped in Asia, but are firmer in Europe.
  The 10-year US Treasury yield is a
little higher today, though still about five basis points lower on the week.
 European yields are 1-3 bp higher on the session to pare this week’s


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