The US Dollar : Correction Time Again Or….?
The US Dollar has had a turbulent year, first dropping to an all time low against the Euro in July only to surge to around the 1,20 level in October / November on the back of dropping equity markets, working as a safe haven for investors.
In recent days the Dollar has again dropped significantly in value against major currencies and especially the Yen & the Euro and the question is now what we can expect to see from the Dollar in 2009 with an ongoing credit crunch and crisis, wavering economies and lack on consumer demand in most sectors and countries ?
This post looks into some of the prevailing views on where the US Dollar is headed in 2009.
MarketWatch highlights the irony of the strong Dollar in the second half of 2008 which was based not on a strong US Economy but rather the fact that investors and governments alike fled into the Dollar as a safe haven and falling US interest rates too supported the increasing Dollar:
In 2008, the dollar did what most analysts expected it to do, but not for the reasons most had expected.The U.S. economic recovery that many had predicted failed to materialize. Instead, the credit crunch morphed into a crisis, the slowdown turned into a full-blown recession, and U.S. interest rates went further down instead of up.But the dollar still came roaring back to life in the second half, buoyed not by better U.S. fundamentals but by a mostly unexpected rush to safety.
The consequences of the dollar’s strength in the second half of 2008 will be seen throughout the first half of 2009. The prior strength of the dollar will eat into the profit margins of many U.S. companies that are doing business abroad,” said Kathy Lien, director of currency research at GFT in New York.
“This move is very well-justified and has a long way to run.” Standard Chartered is preparing to cut its dollar forecasts, Minikin said.
The dollar is likely to decline “longer term,” analysts including New York-based Ashraf Laidi at CMC Markets wrote in a report. “Prospects ahead appear particularly ominous for the world’s reserve currency once global economic stability starts to build up.”
The Fed’s debt purchases will cause the dollar to weaken to $1.4860 per euro, analysts led by Robert Sinche, New York-based head of global currency strategy at Bank of America Corp., wrote in a report yesterday. The Fed reduced the scarcity of dollars and investors slowed the deleveraging process, which drove the currency to a 2 1/2-year high against the euro in October, Sinche said.
“Those temporary supports for the dollar appear to have eroded,” Sinche wrote. “Aggressive quantitative easing by the Fed should add to U.S. dollar supply globally and undermine the value of the dollar.”
“If it walks like a duck and talks like a duck … it’s a duck,” Fitzpatrick and Devani wrote. “The dollar walks and talks like a currency going back into its bear market.”
For UBS AG, the world’s second-largest foreign-exchange trader, demand for cash amid the freeze in bank lending will support the currency. The Libor-OIS spread, a gauge of cash scarcity favored by former Fed Chairman Alan Greenspan, was at 140 basis points today, or about 14 times its average in the five years before the credit crisis began.
“There is still a premium on liquidity, which will be supportive to the dollar even in the current environment,” said Geoff Kendrick, a senior strategist in London at UBS.
Gertrude Chavez-Dreyfuss of Reuters points out that a weak Dollar poses great risks for the US Treasury as a declining Dollar with short term interest rates sliding to zero, could end up destabilizing the fixed income and credit markets :
Now more than ever the United States needs a strong dollar to convince investors to buy new U.S. debt that will fund a massive fiscal stimulus package, and the banking system bailout, as well as two wars in Afghanistan and Iraq.
But the U.S. government may have to wake up to the reality that money will gradually move out of yieldless U.S. Treasury bills offering near zero return.
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