Long term, the dollar is not a good bet unless the US increases its savings rate and reduces its current account deficit considerably. Monetary easing and fiscal stimulus only exacerbate the problem.
But never forget the Wall Street saying, “Don’t fight the tape.”
From Bloomberg:
Ben S. Bernanke’s decision to lower interest rates 1.25 percentage points last month will end the dollar’s two-year slide, according to the world’s biggest currency traders.For the first time since 2003, investors are focused on relative growth prospects rather than absolute borrowing costs, according to Geoffrey Yu, a London-based strategist with UBS AG, the No. 2 trader. The steepest cuts by a Federal Reserve chairman in seven years will support economic growth in the U.S. as Europe slows, said BNP Paribas SA, the most accurate currency forecaster Bloomberg tracks. The dollar will gain at least 9 percent against the euro this year, UBS and BNP predict.
“We’re not chasing dollar weakness any lower,” said Robert Robis, a fixed-income manager in New York at OppenheimerFunds Inc., which oversees $260 billion. “The Fed’s actions have avoided a long recession and we may start to see a recovery later this year.”…
Futures traders cut the value of contracts benefiting from a drop in the dollar to $13.9 billion as of Jan. 29, according to Charlotte, North Carolina-based Bank of America Corp., the second-largest U.S. bank by assets. That’s down from a record $32.3 billion in November….
While two Fed cuts slashed the target rate for overnight loans between banks to 3 percent in nine days, the European Central Bank kept its benchmark rate unchanged at a seven-year high of 4 percent in an attempt to curb inflation. The ECB will keep rates unchanged at its Feb. 7 meeting, according to all 55 economists surveyed by Bloomberg News.
“If aggressive cuts by the Fed can stimulate the economy, then the U.S. will definitely lead the way in terms of economic recovery,” [UBS strategist Geoffrey] Yu said. “The ECB is behind the curve, so it’s time to move back” into the dollar, he said.
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If the ongoing rate cuts create a dollar carry trade, it will hurt both the dollar and US stocks, and the Fed will quickly cry uncle. The fundamentals haven’t changed a bit: jobs and housing prices are not picking up anytime soon, the recession has only just begun, and recent foul weather in China means that they’ll be exporting an extra dose of inflation.