Let's look at the reasons a currency rallies.
1.) The country's interest rates are increasing. Here is the money quote from the latest Fed statement:
Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
To me, this statement leans towards an increase. But, it doesn't say we're going to increase rates. Instead, it says the "upside risks to inflation are high." But also note the Fed has been saying for some time they expect commodity prices to decrease (which they are right now). So that might take some of the bite out of this statement.
So long as commodity prices continue to decrease or remain where they are for now, there is no reason from a policy perspective (price stability) of increasing rates.
2.) A growing economy. Do I have to lay this done again? The economy is in the early stages of a recession. If you don't see that then you're an idiot.
So -- the two primary fundamental reasons for a currency to increase are gone. That means there is a non-fundamental reason for the dollar's rally.
And indeed there is. There has been a fundamental change in the European interest rate outlook.
The euro fell the most in almost eight years against the dollar as traders pared bets the European Central Bank will raise interest rates as the economy slows.
The euro is poised for its biggest weekly loss since January 2005 after ECB President Jean-Claude Trichet yesterday said economic growth will be ``particularly weak'' through the third quarter. An index that tracks the dollar against the currencies of six U.S. trading partners touched the highest since February. Crude oil fell to a three-month low, silver reached its cheapest since January and copper headed for its biggest weekly drop since March, easing inflation concerns.
``This is the beginning of a new chapter for the dollar as Trichet and other central banks are paying more attention to the downside risk to growth,'' said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago. ``The decline of oil prices is a significant driver behind this dollar rally because it enables other central banks to turn their eyes away from inflation and focus on growth.''
In other words, there is nothing that has changed regarding the US economy or the Federal Reserve. There is a big change in the EU area. That means the dollar isn't increasing but the euro is falling. That's a big difference then a dollar rally.
6 comments:
That makes sense but leaves out the possibility this is just a balloon letting air escape, that is, USD is enjoying brief respite before getting 'blown up' again. All signs point to continued malaise here in U.S. while euro should enjoy greater ties with Asia and benefit that will bring. I think we're headed back to $1.60 before $1.40 as $2 Bennie Bernanke will continue to prove ineffective (except in his ability to 'print' dollars to fuel 'growth')
OK, Bonddad. Where does the yen fit into that picture? Does it's relationship to the dollar remain stable while it, too, increases against a less valuable euro?
I agree with this analysis.
What needs to happen is for the Asian currencies to rise.
The problem is, most Asian nations want to maintain high employment and are willing to pay to get it. We are probably headed for greater imbalances before we get the necessary adjustments.
--Charles of MercuryRising
www.phoenixwoman.wordpress.com
Vat have you don wis zee Weimar und der Beagle?
I believe it's the anticipatory post-Bush rally. While there are no fundamentals supporting the rally, there's some number of people who believe the U.S. will return to sanity with his departure from office.
I'm not that optimistic about either the economic health of the U.S. or BushCheney's voluntary departure from office.
I agree with this analysis. I think we are in for more dollar weakness. I recently interviewed Jim Rogers and he was very bearish on the U.S. Economy and the dollar. You can view the interview at www.stockshotz.tv
Who knows what will happen in the short term---volatility is the only thing for sure, but I think the long term trend is bullish for gold and oil----bearish for equities and the dollar. I hope I am wrong, but don't think I am.
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