The Unloved Dollar
Kurt Brouwer November 14th, 2007
The dollar has been in a long-term decline since it peaked in 2001. See How Far Has the Dollar Fallen? And Why? for a more in-depth look at the reasons for the dollar’s decline.
At this point, we are starting to see signs that a turnaround may be in sight as this piece from the Wall Street Journal suggests [registration required; emphasis added]:
Unloved Dollar Might Just Win Favor Again (Wall Street Journal, November 14, 2007, Mark Gongloff)
‘The dollar has become the world’s financial instrument that nobody seems to love…
…The Federal Reserve’s broad dollar index, which measures the buck against a basket of currencies, is near its lowest level in 11 years. The dollar has tumbled 44% against the euro since 2002. Even the lowly Japanese yen, which has tended to be weak against the dollar, is up 7% against it this year.
There are good reasons the dollar is becoming an outcast. The U.S. credit crunch dangles over it like an anvil. Currency traders expect the Fed to respond by cutting short-term rates. That’s potentially bad news for the dollar because it would mean investors get relatively less interest for holding their assets in dollar deposits compared with other currencies like the euro or pound.
Yet all this dollar bearishness has some analysts and investors thinking the out-of-favor currency could be due for a bounce.
Stephen Jen, Morgan Stanley’s chief currency economist, says the U.S. currency has gotten “grossly undervalued.” His forecasting model takes into account interest rates, productivity growth, budget deficits and a host of other factors. It’s telling him the buck is about 25% lower than it should be against the euro and 21% undervalued against the pound, though it might have further to fall against the yen.
Mr. Jen argues that the shrinking U.S. budget and trade deficits should bolster the dollar. And if economic worries spread beyond U.S. shores, an increasing number of investors could run toward safe Treasurys.
The euro’s strength could hurt Europe’s economy by cutting demand for exports. European Central Bank President Jean-Claude Trichet talks like John Wayne about fighting inflation. But officials and executives in Europe complain that growth there is at risk. If the economy weakens and the ECB cuts interest rates, the dollar could benefit…’
It is not a matter of if the dollar will rebound, but rather when the dollar will rebound. Once the Federal Reserve stops cutting interest rates, the dollar should stabilize versus the Euro.
- Economy , Geopolitics , Money
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