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Monday 8 December 2008
Rough landing may await high-flying US dollar
The reality of low interest rates and a deep economic recession should finally start to catch up with the US dollar next year, after risk aversion and deleveraging helped push the currency to multi-year highs.
The reality of low interest rates and a deep economic recession should finally start to catch up with the US dollar next year, after risk aversion and deleveraging helped push the currency to multi-year highs.
The advance - which has pushed the dollar up almost 20 per cent against a basket of six currencies since July - is “artificial” and may subside once extreme risk aversion eases and global markets stabilise, according to analysts.
“Foundations for the dollar’s recent rally have not been solid: the result of repatriation, deleveraging, quantitative easing and a major scarcity of dollars,” said Bob Sinche, head of global foreign exchange and rate strategy at Bank of America in New York. “But now we are bound for a correction.”
Mr. Sinche said the euro may be trading at US$1.38 by the end of this month and that it may rapidly dip to US$1.44 by the first quarter of next year before the pair resume a “more gradual sell-off”.
The European currency was last trading in New York at 1.2804 to the dollar compared with a record high of 1.6038 on July 15. Demand for the greenback rose as the financial crisis deepened and even as the US Federal Reserve cut interest rates.
“The dollar was at the receiving end of leverage flows and also concerns about the euro zone’s ability to navigate its first systemic crisis,” said Daniel Katzive, director for global foreign exchange at Credit Suisse Securities. “But the US currency is no longer very cheap.”
Mr. Katzive said it may be premature to call the end of deleveraging, and that the euro’s rate agains the dollar may fluctuate until the end of the year. But extreme risk aversion was beginning to show signs of easing, which, combined with lower rates and a weak economy, should start to add pressure on the dollar, he said. Credit Suisse forecasts the euro to trade as low as US$1.23 in the near term but to rebound to US$1.37 in about six months.
Most currency strategists seem to expect volatility in the euro, sterling and yen against the dollar to decrease in the next few weeks.
“If the equity markets manage to hold on to some of [their] gains, with some relaxation in risk aversion, we may see a pull-back in euro/dollar,” said Tom Fitzpatrick, chief technical analyst at Citigroup in New York. “Some weakening in the dollar is not inconceivable.”
Still, for many analysts, the outlook for the dollar in the next couple of months will depend greatly on the impact that lower benchmark interest rates across the globe will have on multiple currencies.
Most major central banks have been cutting rates, aggressively trying to revive local financial markets and economies since the global financial crisis deepened in September.
Last week alone, the European Central Bank, the Bank of England, Sweden’s Riksbank and the Reserve Bank of New Zealand all matched or exceeded easing expectations at rate-setting meetings. The ECB cut interest rates by 75 basis points in its biggest move ever. Its main refinancing rate now stands at 2.5 per cent, the lowest in nearly 2-1/2 years - but still more than double the US Fed’s benchmark rate of 1 per cent.
Some analysts argue that a correction of the dollar’s value will not be immediate.
“Global yield differentials are collapsing and it is perhaps just a few months before rates in the euro zone and the UK fall very close to the US rates,” said Vassili Serebriakov, currency strategist at Wells Fargo Bank.
“Once financial conditions stabilise and risk appetite returns, the yield attraction of currencies such as the pound and the euro over the dollar is likely to have disappeared,” he added. Wells Fargo forecasts the euro will be trading at US$1.26 in six months and at US$1.28 in one year.
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Rough landing may await high-flying US dollar
Vivianne Rodrigues, Reuters
7 December 2008
The reality of low interest rates and a deep economic recession should finally start to catch up with the US dollar next year, after risk aversion and deleveraging helped push the currency to multi-year highs.
The advance - which has pushed the dollar up almost 20 per cent against a basket of six currencies since July - is “artificial” and may subside once extreme risk aversion eases and global markets stabilise, according to analysts.
“Foundations for the dollar’s recent rally have not been solid: the result of repatriation, deleveraging, quantitative easing and a major scarcity of dollars,” said Bob Sinche, head of global foreign exchange and rate strategy at Bank of America in New York. “But now we are bound for a correction.”
Mr. Sinche said the euro may be trading at US$1.38 by the end of this month and that it may rapidly dip to US$1.44 by the first quarter of next year before the pair resume a “more gradual sell-off”.
The European currency was last trading in New York at 1.2804 to the dollar compared with a record high of 1.6038 on July 15. Demand for the greenback rose as the financial crisis deepened and even as the US Federal Reserve cut interest rates.
“The dollar was at the receiving end of leverage flows and also concerns about the euro zone’s ability to navigate its first systemic crisis,” said Daniel Katzive, director for global foreign exchange at Credit Suisse Securities. “But the US currency is no longer very cheap.”
Mr. Katzive said it may be premature to call the end of deleveraging, and that the euro’s rate agains the dollar may fluctuate until the end of the year. But extreme risk aversion was beginning to show signs of easing, which, combined with lower rates and a weak economy, should start to add pressure on the dollar, he said. Credit Suisse forecasts the euro to trade as low as US$1.23 in the near term but to rebound to US$1.37 in about six months.
Most currency strategists seem to expect volatility in the euro, sterling and yen against the dollar to decrease in the next few weeks.
“If the equity markets manage to hold on to some of [their] gains, with some relaxation in risk aversion, we may see a pull-back in euro/dollar,” said Tom Fitzpatrick, chief technical analyst at Citigroup in New York. “Some weakening in the dollar is not inconceivable.”
Still, for many analysts, the outlook for the dollar in the next couple of months will depend greatly on the impact that lower benchmark interest rates across the globe will have on multiple currencies.
Most major central banks have been cutting rates, aggressively trying to revive local financial markets and economies since the global financial crisis deepened in September.
Last week alone, the European Central Bank, the Bank of England, Sweden’s Riksbank and the Reserve Bank of New Zealand all matched or exceeded easing expectations at rate-setting meetings. The ECB cut interest rates by 75 basis points in its biggest move ever. Its main refinancing rate now stands at 2.5 per cent, the lowest in nearly 2-1/2 years - but still more than double the US Fed’s benchmark rate of 1 per cent.
Some analysts argue that a correction of the dollar’s value will not be immediate.
“Global yield differentials are collapsing and it is perhaps just a few months before rates in the euro zone and the UK fall very close to the US rates,” said Vassili Serebriakov, currency strategist at Wells Fargo Bank.
“Once financial conditions stabilise and risk appetite returns, the yield attraction of currencies such as the pound and the euro over the dollar is likely to have disappeared,” he added. Wells Fargo forecasts the euro will be trading at US$1.26 in six months and at US$1.28 in one year.
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