The dollar’s sudden strength against other key currencies may reflect expectations of economic weakness overseas, not assurance that the US economy is expanding.
Due to the fall of the dollar, it is currently the best period for foreign tourists visiting the USA…and also for groups of Americans exporting their goods. If we compare this to the Dickens novels , the current period has never been so bad for the purchasing power of American customers.
The dollar’s sustained deterioration over the past six years, as well as its fall last year, have contributed to all of this and more. And that has made the recent resurgence of the dollar against other major currencies all the more remarkable. Some see the nice rebound in the dollar over the past few years as a sign of growing confidence in the possibility of economic growth, but that rebound may turn out to be just a tale or two. (or even more) diverging monetary policies.
On August 5, the Federal Reserve’s monetary policy committee assigned to the federal fund alone 2.0%. Two days later, the European Central Bank stabilized its key interest rate at 4.25%. The Federal Reserve said reluctant bank credit, the continued contraction in the housing market, and high energy resource prices were likely to continue to hamper economic growth over the next few years, and added that it expected inflation to moderate over the next 18 months. The ECB seemed more willing to acknowledge a downside risk to economic growth in the Eurozone, even anticipating a possible sharp economic contraction in Italy on August 8, as well as a forecast of a slowdown in the economic growth rate in Germany during the second quarter.
HOPE, WE DESHOPE
Investment strategists say they expect the Federal Reserve’s next move will be to hike rates, while the ECB seems more inclined to cut rates, at least during next year. This idea devalued the euro against the dollar on August 8 and worsened its weakening on August 11. The U.S. dollar index, a futures contract offered by the New York Commerce Administration that indicates the position of the dollar against other currencies, rose 0.37% to 76.125 points on August 11 after jumping nearly 3.3% in the week ending August 8.
‘The recent rise in the US dollar is largely due to market expectations of US short-term interest rates bottoming out, coupled with a diminished likelihood of further restraint on credits granted by the ECB’ wrote in a note published on August 8 Alec Young, international equity strategist attached to the financial firm Standard & Poor’s Equity Research Services, citing a significant rebound in the dollar against the euro, the yen, to the British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc from the trough it experienced on March 17, 2008, when it broke its record low for the year to 6 , 7%.
Currency strategists at US bank Brown Brothers Harriman were quick to declare in a research note published on August 8 that the downward trend in the dollar, which has continued for many years, was over, thus having ended the ‘bottom scraping’ process.
Citing the ridiculous heights tech stocks hit in the late 1990s and 2000s, the warning predicted ‘we will be gazing, with similar bewilderment, on the pound’s $2.10 and euro above $1.60, while the value of the Australian dollar will approach that of the US dollar.’
SELL DURING EURO ZONE RALLY?
It was impulsive traders who drove the dollar rebound, rather than longer-term institutional investors who have yet to reverse their faith in the dollar’s decline, says Meg Browne, chief currency strategist at Brown Brothers Harriman, in an interview with BusinessWeek.com. She cited data on speculative positions taken by the International Money Market in Chicago during the week ending August 5.
‘I don’t think people have bought into the idea that the dollar is up in the long run against the euro,’ Browne admits. This is a process that will take a long time.’ Although the euro index has peaked at just over $1.60, the currency is likely to see some buying in response to gross domestic product figures in key economies in the zone. euro, predicts Brown.
With the equivalent euro on August 8 at $1.5285 beating its worst record in four months, Browne suggests staging eurozone rallies to rectify this currency, with the aim of initiating a series of longer-term euro short positions.
The dramatic fall in the price of oil and that of other products or foodstuffs in recent weeks has also played an important role in the recovery of the dollar, since the price of these products tends to be indicated, most of the time, in dollars, announce the observers.
‘During the past few months, whenever commodity prices rose, the dollar tended to depreciate. Now that trend is starting to reverse,” says Ihab Salib, portfolio manager and head of international fixed income at Federated Investors (FII), a financial services firm based in Pittsburgh, Pennsylvania. Salib isn’t sure there’s a direct link between the strength of the dollar and commodity prices, which he says are falling in response to declining demand as economic growth rates around the world slow.
He adds however: ‘if we see that the price of products continues to increase, then at least a rise in the dollar will be felt’.
DOLLAR READY TO REVERSE TREND
Another reason for the dollar’s rebound has to do with the noticeable help it has received from both the US Treasury Department and the Federal Reserve in recent months, says Carmine D’Avino, a financial adviser at Pinnacle Associates, an investment advisory firm that deploys exchange-traded funds into client portfolios. “It’s very rare for the Federal Reserve to talk about the value of the dollar,” says d’Avino, but he thinks the comments made by Ben Bernanke, Federal Reserve Chairman, on the dollar on June 3 (read the article published on 3/06/08) were motivated by his concern that the weaker dollar could contribute to pressures exerted by inflation .
D’avino goes on to say that he began including shares of the services company Power Shares Deutsche Bank US Dollar Index Bullish Fund (UUP) in his June portfolio because he was increasingly concerned that the dollar was oversold.
Frank Trotter, president of EverBank Direct, the online banking service run by Jacksonville, Fla.-based EverBank, thinks the dollar’s depreciation may have been exaggerated due to soaring oil prices and of the financial crisis that escalated earlier this year. That could help the dollar continue to strengthen this fall, or even this winter, but he thinks the essential economic factors still point to a longer-term decline.
DOUBTS ABOUT THE SHAPE OF THE DOLLAR
Trotter cites fiscal policy (notably the growing trade deficit) as the main reason for the dollar’s decline over the past six years, and the root of a more noticeable depreciation over the past few years. a few years to follow. ‘There are better opportunities available to investors around the world,’ he said. They would be much better off investing in China, Singapore, Australia, maybe even Thailand and Malaysia, and certainly India, since the growth rates in those countries are much higher,’ both in terms of direct investment and playing in the stock markets of these countries.
After presidential elections in November, and regardless of which party wins the White House, Trotter predicts that the budget deficit will stretch for the next two years. He believes it is likely that domestic spending and ongoing military expenses will outpace the increase in tax filings.
Browne, of Brown Brothers Harriman bank, is more optimistic about the dollar’s chances of recovering over the next few years. She maintains that the United States is unlikely to suffer a recession, although she doubts that the GDP rate will soon return to its long-term levels, which stand at 2.5% and 3 %.
Salib of Federated Investors is less confident: ‘US economic growth is unlikely to look good over the next several quarters. Rates should hold, which should limit the rise of the dollar from now on,’ he argues.