Is there an end in sight for the devaluation of the Dollar?
*The Economist, March 16, 2008:
"THERE seems to be no floor for the dollar at the moment. On March
13th, it fell below ¥100 for the first time and hit a record low of
$1.5624 to the euro. The greenback is even back below $2 to the pound,
despite sterling’s recent weakness. And on a trade-weighted basis, the
American currency has hit yet another nadir.
Like a glutton at an all-you-can-eat buffet, there is almost an
embarrassment of nourishment for dollar-bears. For those who focus on
yield, there is the prospect of imminent rate cuts by the Federal
Reserve, with analysts talking about 2%, or even 1%, as the eventual
low. Meanwhile the European Central Bank seems determined to hold rates
at 4%.
For those who are worried about the credit crunch, there is the failure
of the Carlyle Capital bond fund and the short-lived boost given by the
latest central-bank liquidity package. As David Bowers of Absolute
Strategy Research has pointed out, America will have difficulty funding
its current-account deficit until the credit crisis is sorted out.
For those who are worried about the American economy, the latest 0.6%
monthly fall in retail sales will confirm their fears. (American data
have, on average, looked weaker than Europe’s in recent weeks.) And for
those who believe that real assets (like gold and oil) are more
attractive than paper money, the rise in bullion to above $1000 an
ounce and crude to $110 a barrel will confirm their prejudices.
What succour is there for the dollar bulls? One argument is that the
Fed is being much more decisive than other central banks and thus the
eventual recovery in the American economy will be faster and steeper.
If that is the case, then American interest rates may start rising
again next year, giving the currency yield support.
A second is that the dollar’s decline is now having an effect on the
non-oil element of the trade deficit, and thus is steadily weakening
one of the long-term bearish arguments. The final argument is that the
dollar is now cheap on fundamental grounds (an argument that will seem
convincing to any European tourist) and that, with sentiment almost
universally negative, the only way is up.
The problem for the bulls is that when negative sentiment towards a
currency sets in, it can be very hard to stop. There is a widespread
perception that the American authorities are pretty relaxed about the
dollar’s weakness.
And even if they did care, what could they do about it? They are hardly
likely to raise interest rates with the financial sector and the
economy in such poor shape."
*This information is solely a highlight of the opinion of a third-party publication and is incomplete. Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.
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