Dollar Index 2012-06-01 to 2012-06-30

Summary:
Florida's dollar index dropped again in June, marking four consecutive months of decline. Year-to-date, the dollar index is down 4.46%, and it is nearly 13% lower than one year ago. This month's decline was led by the real, which lost 3.28% from May, but all three currencies declined against the greenback. Moreover, the euro has lost nearly 5% so far this year while the real is down over 10%. However, the Canadian dollar--also known as the loonie--is hanging on, remaining relatively flat on the year.

Extended Analysis:
Since the European sovereign-debt crisis dominated moves in currency markets once again in June, we start our analysis with the euro, as it had much to do with changes to the loonie and the real. Early in the month Spanish Prime Minister Mariano Rajoy suggested that Spain would need a bailout, calling for a liquidity injection into Spanish banks after yields began to rise to unsustainable levels. Even though Spain’s request was met with a 100 billion euro bailout, this did little to ease investors’ fears due to the combined concerns that Spanish debt holders faced some sort of restructuring and that the country’s economy was still showing signs of weakness. Moody’s downgraded Spain’s credit rating during the month, and yields continued to move above 7% several times. Greece also gave indigestion to investors’ appetite for risk, as citizens returned to the polls for another round of parliamentary elections after the anti-austerity political parties failed to form a coalition. Although the New Democracy party won the elections—supporting the bailout accord—Greece’s new prime minister had to miss the EU summit in Brussels due to eye surgery. Also, Cyprus became the fifth Eurozone member to request a bailout in June, while also trying to secure funds from other countries, such as Russia. And finally, German Chancellor Angela Merkel continued to grit her teeth and remain at odds with other European leaders, stating before the EU summit that she would never support Eurobonds. Even so, the month ended on a somewhat positive note, as the summit resulted in the most progress seen in some time, with Merkel submitting somewhat by agreeing to use rescue funds to help struggling nations, although some of the specifics still remained unclear.

The turmoil in Europe took its toll on the loonie, since risk aversion for currency traders usually means fleeing to the safety of the greenback. Moreover, poor economic data from the U.S.—Canada’s biggest trading partner—increased concerns that Canada’s economy is not expected to grow by as much as the Canadian Central Bank had previously thought. This negatively affected the loonie, due to anticipation that the central bank will likely delay their previous plans to raise interest rates. Since raising interest rates is accomplished by decreasing the money supply, this would have increased the value of the loonie versus other currencies (such as the greenback). Further depressing Canada’s expected growth in GDP is the decline in oil prices, as oil is one of the country’s chief exports. The loonie may see some strength later this year, but through at least July it seems as though the trends that have a strong affect on the currency will not be in favor of growth.

Although Brazilian officials were interested in driving down the value of the real earlier this year, the European crisis has now pushed it too far. Even though loose monetary policy from developed nations had hurt Brazil’s exports before, there are now concerns of high inflation. These inflationary concerns led Brazil’s central bank to offer dollar-swap contracts in June, which gave investors the ability to swap paper—or short-term debt—linked to Brazilian interest rates for contracts linked to the greenback, boosting demand for the real and keeping it from loosing too much value against other major currencies. Moreover, exports increased due to cheap prices. For example, South Korea bought more grain exports from South America in June, and purchased less from the U.S. Still, weakening global growth puts Brazil’s real under fire, possibly hurting future exports. With the skepticism remaining in the Eurozone, and a global downturn in GDP, we see Florida’s dollar index pulling back even further in July, finishing the month around 124.