FOREX VIEW: After Brief Rest, Dollar Bears Prowl Again
After days of frenzied activity during the month of May, currency markets started June in a decidedly quieter pace.
On some days this week, the dollar's exchange rate against its principal counterparts barely moved. For traders who had become used to this massive market once again being an exciting, fast-moving, not to mention profitable place, the change was tangible.
But that's not to say it's time to pack up and go home. In fact, some of the choppiness and volatility seen in May was clearly creeping back into Friday's trading session, with the euro jumping back towards its record high of $1.1930 in the wake of increased tension in Israel and Palestine, as well as a clear escalation in killings in Iraq. 'The word geopolitical, which I thought thankfully had left the vernacular, has now come back,' said Thomas Molloy, a currency trader at Bank Leumi in New York.
If anything, the fact that the dollar has had a relatively quiet week indicates the currency markets could suddenly get a lot more interesting again. That's because the conventional theory governing realignments in currencies is a bit like the urban myth about weight loss programs: crash diets might make it easier to lose weight quickly, but harder to keep it down, whereas a less extreme diet tends to reap better long-term results.
The range of opinion in the foreign exchange markets is vast, some prominent analysts think the euro will be at $1.10 in a few months time, others think $1.30 is a more likely outcome. But the simple fact is that the dollar has been on a steady diet for a couple of years now and the key factors that have driven this adjustment remain very much in play.
One is interest rate differentials. Displaying an unusual degree of anonymity, the markets are expecting the Federal Reserve to cut interest rates from their already 40-year lows on June 25. An easing of half a percentage point would kick much wider the already lofty yield difference between U.S. rates and many of their global equivalents, in particular those in Canada, the U.K., Australia or even the euro zone, only fueling the argument to shift capital out of the U.S. towards higher-yielding homes elsewhere.
Then there's the niggling issue of the U.S. current account deficit which has long been nipping at the dollar's heels. Although April's trade data showed a slight narrowing in the trade deficit, in constant dollar terms it actually widened. The only reason the nominal deficit narrowed was due to the decline in oil prices.
There's also little in the way of official action from policy makers to really turn the dollar's fortunes around. While Treasury Secretary John Snow and his boss President George W. Bush have been at pains to stress that there is a strong dollar policy - it's almost in the 'read my lips' category - the simple fact is that the currency markets don't believe them.
Unlike the Japanese government, which has been busy for months trying to defend its own `strong dollar policy' buying dollars and selling yen, the policy behind the Bush administration's strong dollar mantra doesn't really exist. The only thing U.S. authorities don't want now is a falling-off-a-cliff scenario, which could quickly morph into a crisis of confidence that sends investors stampeding out of U.S. asset markets.
Clearly, this hasn't happened. While the dollar's decline against the euro this year has been impressive, it's still been 'gradual' and 'orderly', buzzwords favored by markets and public officials alike. The euro has gained about 13% on the dollar since the beginning of the year, but rarely has it clocked up more than 1% or 2% on a given day.
On top of all this, the dollar bears that have been a major driving force in this whole downturn for the currency, aren't convinced in the U.S. second half recovery scenario held by many economists. The bond market certainly isn't convinced and much of the optimism that's been periodically visible in the U.S. equity market seems to be based on more of a shaky foundation of hope than anything rooted in fact.
'The dollar and equity markets have decided they're going to go hand in hand only when the equity market is weak,' said Molloy, at Bank Leumi.
All of this leaves the dollar firmly on the low road. We may not be in for the same kind of volatility seen mostly in the wake of Snow's perceived dismantling of the already-diluted strong dollar policy last month, but it does seem too soon to conclude that the dollar's decline has ended.
汇市展望
