Despite Rally, Dollar ‘Is Not Out of the Woods’

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

Just because the dollar posted its biggest gain against the euro in almost eight years doesn’t mean the American currency won’t be plagued by the nation’s slowing economy, widening budget, and trade deficits and negative inflation-adjusted interest rates in the coming months.

The 4% surge against the single European currency this month was enough to prompt Bank of America Corp. to tell its customers to exit trades betting on more gains. Morgan Stanley forecasts the greenback will approach a record low by October as the American housing slump and credit-market losses keep the Federal Reserve from raising interest rates this year.

Barclays Plc in London and New York-based Merrill Lynch & Co. said trading patterns suggest the dollar’s 5.1% gain in the past three weeks measured by an index of six major trading partners can’t be sustained.

That’s mostly because there’s no indication American will return to the late 1990s annualized gross domestic product growth of 4.23% with inflation running at no more than 3.3%. Since September, 2000, the dollar has declined more than 44% as inflation accelerated to an annual 5% today, growth slowed to 1.9% and interest rates in America provide no cushion for holding American assets.

“I would not chase the dollar’s strength versus the euro as the pair has moved beyond interest-rate support,” a strategist in New York at Morgan Stanley, who also recommended closing out bets on the dollar versus the currencies of Malaysia and Singapore, Sophia Drossos, said. “The dollar is not out of the woods. It will take the market a while to come around to our point of view.”

The dollar strengthened to $1.5005 to the euro last week from $1.5564 on August 1, the biggest weekly increase on a percentage basis since January 2005. It surged 2.08% on August 8, touching $1.4998, the most since September 6, 2000, and the second largest rally since the euro was introduced in 1999.

Those gains sent the dollar above the $1.51 a euro yearend mean target of 39 analysts in a survey by Bloomberg. By the end of 2009, the dollar will likely strengthen to $1.40 a euro, based on the estimates. It gained 6.4% since hitting a record low of $1.6038 on July 15.

In addition to the gains against the euro, the dollar also appreciated 2.3% versus the yen to 110.18, the most in eight weeks. The euro lost 1.29% against the Japanese currency to 165.38, the biggest drop in 13 weeks.

American economic data suggest that a sustained recovery isn’t imminent, the head of global currency strategy at Bank of America in New York, Robert Sinche, said. Interest-rate swaps indicate the currency should trade at about $1.54 a euro, said Mr. Sinche, who still forecasts that the dollar will strengthen to $1.45 a euro by the second half of next year.

The number of American home foreclosure filings more than doubled in the second quarter from a year earlier, according to RealtyTrac Inc., a seller of default data. Government reports this week may show retail sales fell 0.1% in July, the first decrease since February, and the American trade deficit widened in June to $62 billion from $59.8 billion.

The American budget deficit, which totaled $163 billion for 2007, is forecast by the administration of President Bush to widen to a record $482 billion for 2009.

Morgan Stanley predicts the dollar will weaken to $1.60 by October, because the faltering American economy means the Fed is unlikely to raise rates anytime soon, Ms. Drossos said. That means investors will suffer inflation-adjusted returns that are negative based on the current annual consumer price index of 5% and Treasury securities yielding between 1.695% for three-month bills and 4.53% for 30-year bonds.

Rather then a vote of confidence in the outlook for the American economy, the euro’s tumble on August 8 was triggered by traders paring bets the European Central Bank will lift borrowing costs after president of the ECB, Jean-Claude Trichet, said economic growth will be “particularly weak” through the third quarter. Mr. Trichet spoke after the central bank left the main refinancing rate at 4.25%.


The New York Sun

© 2024 The New York Sun Company, LLC. All rights reserved.

Use of this site constitutes acceptance of our Terms of Use and Privacy Policy. The material on this site is protected by copyright law and may not be reproduced, distributed, transmitted, cached or otherwise used.

The New York Sun

Sign in or  Create a free account

By continuing you agree to our Privacy Policy and Terms of Use