Wednesday, July 13, 2011

Today's Major Market Move - Paraguayan Guarani Strengthens 15% vs the US Dollar this Year

Is the Paraguay Guarani now the Swiss Franc of the southern hemisphere? Over the past year it's been behaving like a safe haven currency, strengthening during times of turmoil. It's up 15% since January, making it the best performing currency on the planet (I'm leaving out Zimbabwe, for obvious reasons. The Zimbabwean dollar has effectively been replaced by the US dollar. A few weeks ago our data provider started showing a USDZWD cross of 1.869 and I've yet to figure out why.)

This year the USD is down or flat vs approximately 80% of the currencies in the world and from the recent comments made by Bernanke regarding additional easing, it looks like that trend will continue. That being said, the DXY (US dollar index) has seen a fair amount of support (for the DXY we unfortunately only have historical data going back to April):

It's not surprising that the DXY has held up so well when you consider that the Euro comprises 60% of the basket of currencies and that the Euro has been under pressure from all the PIIGS related turmoil. Here's the breakdown from wikipedia:

Euro (EUR), 58.6% weight
Japanese Yen (JPY) 12.6% weight
Pound sterling (GBP), 11.9% weight
Canadian dollar (CAD), 9.1% weight
Swedish krona (SEK), 4.2% weight and
Swiss franc (CHF) 3.6% weight

Because the DXY is so overweight the Euro, and couple with the fact that no emerging market currencies are represented (no real, no ruble, no rupee and no yuan), its this authors opinion that the DXY is a poor indicator of overall US dollar strength/weakness.

(Click on the images for a larger view.
Click here for the current performance of global currencies.
Click here for the current chart of the DXY.)

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