Too Much Egg Nog For The Dollar Bulls?
Earlier today, the U.S. dollar advanced the most against the euro since June 2004 after it was revealed U.S. consumer prices increased 0.8% last month after a 0.3% gain in October, and producer prices rose the fastest in 34 years in November. The rise in prices prompted traders to pare expectations for interest rate reductions, sending the greenback higher. The U.S. currency rose 1.5% versus the euro over the past five days, which was the biggest weekly increase since August. The dollar was also helped this week by a coordinated plan led by the Federal Reserve to tackle the credit crunch, and the third interest rate cut this year with the goal of avoiding a U.S. recession. The ongoing rally this week meant the dollar pared some of its losses against the euro this year, down 8.5% against the European currency to date.
An increasing number of analysts are painting a bullish picture for the U.S. dollar. Michael Malpede, a senior currency analyst in Chicago at MF Global Ltd., the world’s largest broker of exchange-traded futures and options contacts, told Bloomberg today:
The fundamental picture started to move in the dollar’s favor. Inflation is picking up, making it difficult for the Fed to aggressively cut interest rates.
Malpede predicts the U.S. currency will strengthen to $1.43 per euro by the end of the month. Against the euro, the dollar rose 1.5% to $1.4415 at 2:19 p.m. in New York, from $1.4633 yesterday, according to Bloomberg.
Toshi Honda, a London-based currency strategist at Mizuho Corporate Bank Ltd., said:
The move approaching $1.50 was too rapid, irrational. It was driven by fear of a U.S. economic meltdown, but I don’t think the fear is going to be materialized. The overall sentiment is positive for the dollar.
Honda thinks that the dollar will end the year below $1.40 against the euro. Sentiment does seem to favor a stronger greenback. According to the median forecast of 44 economists in a recent Bloomberg survey, the American currency will be at $1.45 per euro by the end of March and $1.40 by the end of next year.
There are even some who expect the dollar to put on a strong performance should the feared recession materialize. According to participants at this week’s Reuters Investment Outlook 2008 Summit in New York, a U.S. recession, coupled with evidence of global stress, could lead to flight-to-quality flows into the dollar. Robert Kowit, an international bond fund manager with Federated Investors, told Reuters:
If the U.S. goes into recession and it looks like it’s going to have a knock-on in other major economies, the dollar may actually outperform in a recessionary environment.
PIMCO’s Bill Gross added, “I think the dollar has had its run to the downside against the euro and the pound.”
What a change from a few weeks ago, when the actions of rappers and supermodels seemed to indicate the dollar was toast. Yet, some still believe the greenback is on a road to nowhere. Enter Paul Rodriguez, Senior Technical Analyst from the Economic Research Team over at London-based Lloyds TSB (formed in 1995 by the merger of Lloyds Bank and the Trustee Savings Bank). In a December 10 report, Rodriguez said:
As the year draws to a close, the interesting feature for the US dollar remains the short term strength set against potential for longer term weakness in 2008. This broad brush view of the dollar’s outlook is the inverse of the general market’s expectations which satisfies the contrary element of my strategy. It has been clear for some weeks now that the broad US dollar sell off was no longer the one way street it was claimed to be and as prospects for interest rate cuts have been fully absorbed by the market, the rebound should continue.
Yet, Rodriguez warns the dollar’s downward trend remains intact:
However, this does not mean the trend next year will be dollar positive and as sterling recovers from its oversold status, a move back towards 2.11 should see a broader appetite to sell the US currency. Whilst the yen and swiss franc lose ground against the dollar on the back of a rebound in equities, it should be noted that the dollar has fallen a long way and any interim recovery is fully consistent with a continued bear phase…
The dollar index has rebounded and whilst the broader market is broadly dollar bullish, I continue to view the recovery in the context of a long term downward trend.
In a Forbes interview yesterday, legendary investor Jim Rogers warned about the type of dollar rally we saw today:
I’m terribly pessimistic about the state of the U.S. dollar. But there are so many pessimists out there right now that we’re bound to have a rally. I doubt you can find anybody except (U.S. Treasury Secretary Hank) Paulson who is bullish on the U.S. dollars. If that rally comes, I would use that rally to sell the rest of my dollars. I’ve never seen so much pessimism in my life. So I’m a dollar bear looking for a big rally. So I can sell.
And Rogers’ latest prognosis for the greenback?
Sphere: Related ContentThe U.S. dollar is not an asset I want to hold over the next 10, 15, 20 years. We have an idiot running the central bank right now who knows nothing about currency, history or the markets.
