Opportunities in smallcaps header image 2

Dollar lower, higher?

October 22nd, 2008 · No Comments

Some people would argue that with records amount of fiscal deficits, and record low interest rates, the dollar can only go one way, and that’s down. Some people beg to differ..

Dollar days, as analysts predict further rise in greenback’s value
By Matthew Scott

  • The U.S. dollar will continue to strengthen against the euro through the end of the year, although analysts can’t say exactly by how much.
  • Bank of New York Mellon senior currency strategist Michael Woolfolk believes the dollar will keep rising in value as long as oil prices continue to fall and the U.S. trade deficit continues to narrow.
  • Oil prices have dropped from a high of more than $147 a barrel in July into the $70 dollar range this month. Meanwhile, the Commerce Department reported the U.S. trade deficit in goods and services dropped from $63.3 billion in July to $59.1 billion in August. The deficit should continue to drop through the end of the year as the demand for oil in the U.S. declines as well.
  • “We expect oil to stabilize around $50 a barrel early next year,” Mr. Woolfolk predicted. “That is viewed as a dollar positive and a negative for foreign currencies.”
  • While he said the dollar will gain against other currencies, Mr. Woolfolk doesn’t expect it to get back above $1.50 against the euro or $2.00 against the sterling before next year.
  • In trading today, the dollar lost ground against foreign currencies on fears of a deepening U.S. recession. The greenback traded at $1.34 against the euro and $1.73 against sterling.
  • “The dollar is in the process of topping out,” said Brian Dolan, chief currency strategist at Gain Capital. “I think it has experienced most of the gains that it is going to have this year already.”
  • Mr. Dolan expects the dollar to remain in a trading range through the end of the year, mainly because he believes that in coming weeks, market participants will return to their typical risk-seeking behavior, which might cause a pull-back in the dollar’s strength.
  • “The euro against the dollar will fluctuate between $1.33 and $1.43,” he said.
  • But Mr. Woolfolk said the current volatile economic conditions have induced more investors to seek safe havens for their cash, which will serve to strengthen the dollar.
  • “It was the excesses in the U.S. and other imbalances that were driving the dollar lower,” he said, “and as we muddle through the coming recession, we are going to see a lot of those imbalances corrected, which will be positive for the U.S. dollar.”

Readers be aware though, some people can predict some currencies for some time, but we have yet to meet someone who can predict all currencies all the time..

When we were economics students, we had a talk with a currency trader from a big bank. He had a deep suspicion for economist. Their models predicting currency moves were invariably wrong, he argued. We weren’t fully convinced then, but we are now.

Predicting currency moves is as difficult as it gets. For years, people said, the dollar should weaken, the US deficits are not sustaining, they cannot expect foreigners to keep on buying their assets to fund their consumption. Interest rates are usually lower in the US compared to the euro area as well.

One of the great newspaper articles we lost, unfortunately, was one which described no less than 25 reasons why the dollar should rise. And then 25 reasons why it should fall. And believe us, there was considerable overlap in the reasons.

So we take this with a little bit of salt.

Tags: currencies