Is the dollar still plagued by the economy, widening deficits and inflation?
*Bloomberg, by Ye Xie & Anchalee Worrachate, August 11, 2008
“Dollar Gain Signals Pain as Rally Prompts Exit From Bull Trade
Just because the dollar posted its biggest gain against the euro in almost eight years doesn’t mean the U.S. currency won’t continue to be plagued by the nation’s slowing economy, widening budget and trade deficits and negative inflation-adjusted interest rates.
The 4 percent 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 still forecasts the greenback will approach a record low by October as the U.S. 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 percent 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 the U.S. will return to the late 1990s annualized gross domestic product growth of 4.23 percent with inflation running at no more than 3.3 percent. Since September, 2000, the dollar has declined more than 44 percent as inflation accelerated to an annual 5 percent today, growth slowed to 1.9 percent and U.S. interest rates provide no cushion for holding U.S. assets.
‘I would not chase the dollar’s strength versus the euro as the pair has moved beyond interest-rate support,’ said Sophia Drossos, a strategist in New York at Morgan Stanley, who also recommended closing out bets on the dollar versus the currencies of Malaysia and Singapore. ‘The dollar is not out of the woods. It will take the market a while to come around to our point of view.'”
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