Brazilian Real

In 2002, the Dollar fell 10% to 17% against the major currencies: at yearend Europe's common currency, the Euro, was trading at $1.05 vs. $.89 a year earlier; the Dollar was at 118.76 Japanese yen vs. 131.67 and the British pound was at $1.6097 vs. $1.456, respectively. Against the Swiss Franc the Dollar fell 17.4% during 2002. The Dollar's fall accelerated in late 2002, partly due to seasonal factors, but at yearend it was at multiyear lows against some European currencies with the momentum suggesting the weakness would carry into early 2003. The one exception was the Canadian Dollar which rose against the U.S. Dollar in the first half of 2002, but weakened in the second half and closed the year only a penny or so higher than a year earlier. The U.S. Dollar Index, which reflects a basket of currencies relative to the Dollar, started 2002 at about 120 and closed the year near 102, basis weekly nearest futures, New York.

A currency's value has been generally determined by three time-tested variables: interest rate differentials, economic differentials and relative yield inside a country. For the U.S. the Federal Reserve's easier monetary policy that was aggressively implemented in 2001 and continued into 2002 likely helped pressure the dollar's value, especially so when a number of other key central banks were reluctant to follow the Fed's lead and in some countries, like Germany, their economic setting seemed to be in even greater flux than the U.S. Trading in the world's currencies exceeds $2 trillion per day. Most of the trading is via electronic transfers for central banks and commercial banks, but a growing portion of the trading is on organized exchanges where inter-day price swings often have speculative based roots that can exaggerate short term price swings. Annual trading in the IMM's Japanese Yen futures contract alone can exceed several million contracts and not far behind with annual futures volume in the millions are the Swiss Franc and British Pound.

Japan's economy continued disappointing in 2002, as Japan's monetary and fiscal leaders still seem reluctant to implement innovative policies, conditions that in 2001 pressured the Yen's value against the Dollar. However, that same scenario lost its clout in 2002. Indeed, on a global basis, direct foreign investment in the U.S. declined in 2002 owing to doubts about the U.S. economic recovery and the corporate accounting scandals that shook confidence and weighed heavily on the equities markets. The U.S trade gap in November, for example, ballooned to a record $40 billion. Ironically, U.S. manufacturers lobbied strongly in Washington in 2001 for the administration to brake the Dollar's rise since its allowed Japanese competitors to price their producers more aggressively in the U.S. The Dollar's weakness in 2002 seemed to have just the opposite effect with hefty deficits posted once again against Japan. Moreover, considering the apparent economic structural weakness, partly owing to labor factors, in some European nations the dollar's weakness in 2002 in would not seem to have a rational basis, but the global FOREX markets have turned increasing sensitive to outside factors, at least on a short term basis.

What lies ahead for the U.S. Dollar in 2003? The feeling at yearend 2002 was for the Dollar to strengthen slowly, perhaps 8% to 10% against the European currencies and less so against the Japanese Yen by midyear, but its a scenario based largely on a number of calming events coming together; longer term the most important is likely to be the strength of the U.S. economy and a reassurance of capital flow into the U.S. Moreover, the U.S. Dollar will remain the lynchpin for the world's currencies and the U.S. economy the guiding light for the world's economy.

Futures Markets

The Chicago Mercantile Exchange Exchange's International Monetary Market (IMM) trades futures and options on the Brazilian Real, British Pound, Euro FX, Japanese Yen, Mexican Peso, Norwegian Krone, Swiss Franc, the Australian, Canadian, and New Zealand dollars, and EUR/GBP, EUR/JPY, and EUR/CHF cross-rates. The IMM also trades futures on EUR/AUD, EUR/CAD, EUR/NKR, EUR/SKR, AUD/CAD, AUD/NZD, AUD/JPY, GBP/CHF, GBP/JPY, CAD/JPY and CHF/JPY cross-rates as well as E-mini contracts for Euro FX and Japanese Yen. The FINEX division of the New York Board of Trade (NYBOT) trades futures and options on a composite U.S. Dollar Index, British Pound, Euro, Japanese Yen, Swiss Franc, South African Rand, Norwegian Krone, Swedish Krona, the Australian, Canadian, and New Zealand dollars. The FINEX also offers futures and options on EUR/GBP, EUR/CAD, EUR/JPY, EUR/SKR, EUR/CHF, EUR/NKR, EUR/AUD, AUD/NZD, AUD/JPY, AUD/CAD, GBP/JPY, CAD/JPY, GBP/CHF and CHF/JPY cross-rates. Many currency contracts are also traded in Europe and Asia.

Excerpted from the CRB Commodity Yearbook. For more information on Bridge products click here