With America’s high current account deficit not showing much improvement. the dollar’s recent rally seemed to be based on the greenback being oversold rather than improved fundamentals. Historically, countries that run current account deficits in excess of 4% of GDP suffer depreciation of the value of their currency, and the US is still well above that level.
Futures traders doubled bets against the greenback in the past two months, data from the Commodity Futures Trading Commission in Washington show. Citigroup Inc., Deutsche Bank AG and Royal Bank of Scotland Group Plc, which handle almost 40 percent of global foreign exchange trading, say the currency may slump to $1.65 per euro by October, from $1.5672 today…..
“The dollar will continue to move lower in the next couple of months until the U.S. economy improves markedly,” said Adam Boyton, senior currency strategist in New York at Deutsche Bank…
Futures traders have grown more bearish, as three Fed interest rate cuts in 2008 totaling 2 percentage points reduced demand for U.S. deposits. They amassed a net total of 246,101 futures contracts betting on a dollar decline versus eight other currencies, up from 126,342 on Jan. 22, CFTC data show…..
“We are close to a tipping point where, I mean, the willingness to hold dollars is definitely impaired,” billionaire George Soros, 77, said in an interview in New York on April 3. His bet against the British pound in 1992 helped drive the U.K. out of Europe’s system of linked exchange rates.
Foreign private investors sold a net $37.6 billion of U.S. stocks and bonds in the six months ended Jan. 31, the most recent Treasury Department data show. The last time sales exceeded purchases over a six-month period was April 1996….
The U.S. currency received a reprieve last week. The dollar rose 0.4 percent against the euro and 2.2 percent to 101.47 yen as the recapitalization plans by UBS and Lehman Brothers boosted investor confidence in financial institutions shaken by $232 billion of losses and writedowns from the freeze in capital markets.
“The dollar is bottoming out,” said Benedikt Germanier, a currency analyst in Stamford, Connecticut, at UBS, the second- biggest currency trader after Deutsche Bank. It may rise to $1.45 per euro by June, he said.
The median of 41 estimates in a Bloomberg News survey is for the dollar to appreciate to $1.51 per euro by Sept. 30 and to $1.48 at year-end as the U.S. economy recovers and Europe slows.
“The U.S. economy is deteriorating so fast that it’s hard to believe economies outside of the U.S. won’t get affected,” said Tom Fitzpatrick, global head of currency strategy at Citigroup in New York. “As the slowdown in the U.S. reverberates to Europe, the ECB can’t be sitting this one out. They have to cut,” which may limit dollar losses, he said.
Analysts have predicted a rebound before only to be proven wrong. At the start of 2008, they expected the dollar to gain to $1.48 per euro by June and reach 110 yen, according to Bloomberg surveys. They now see it at $1.55 to the euro and 98 yen….
“For verbal intervention or actual intervention to work you need some substantive policy behind it and the last thing you will see right now is a monetary tightening by the Fed,” said Robert Sinche, head of global currency strategy at Bank of America. He expects the dollar may fall past $1.60 per euro this quarter.
Currency issues are highly technical, and I have no special competence here. Still, my gut feel is that we’ll see $2.00 to the Euro before we see $1.50, and we’ll never see them on par in our lifetime again. Europe’s gonna catch the flu, but America’s got the cancer: who’s chit will be worth more, d’you think?
The thing about tipping points is, once one passes them it’s not a change in degree that happens but a change in kind. ” . . . [T]he ECB can’t be sitting this one out. They have to cut.” Or maybe they don’t, but take the trillion dollar of capital inflows we have been counting on and spend _that_ to handle their piddling little recession while we get Depression sandwiches for dinner. Even if the Euro interest rate is cut a little bit, it’s going to stay WELL above the dollar, mid-term at least. Find a fundamental other than ‘fundamental nonsense’ which reads otherwise. Trichet and his boys are playing very high stakes poker; if they _really_ know what they’re playing for they win the keys to our Cadillac lifestyle, i.e. the reserve currency. Everybody thinks that ‘the Europeans don’t want that.” What’s not to like about a multi-trillion dollar interest free loan from the rest of the world and the seat at the head of the table in every deal that gets done?
There have been, depending on how one counts them, either four or six reserve currency regimes in the Western (and now global) monetary sphere over the last 500 years. Changes have occurred before from one national currency to another; currency baskets don’t stay balanced, so the system has tended to optimize around one central player. It’s worth noting that all changes from one national currency/financial center to another have resulted not from the new one ‘beating out’ the old one but rather by the collapse of the old one thrusting the reserve status on the then current World No. 2. Reasons for collapse vary, but in effect all became maximally extended financially, then met an external shock which couldn’t be absorbed, with the ducats knocked out of ’em in consequence. The structural advantages of being the reserve financial force are perhaps too great to overcome in normal situations. Also, No. 2 is macroeconomically adapted to optimize No. 2-dom, and is often, literally, shocked and amazed to have greatness thrust upon it.
Now, we shouldn’t necessarily expect the future to recapitulate the past, but the fact that ‘the Europeans don’t want the Euro as the reserve’ is just not as important as most handicappers think. We flatter ourselves that our ‘intention’ determines outcomes. *Ha*, I say *Ha!* The global financial system needs a reserve currency, and if the US can’t deliver the EU will have greatness thrust upon them—and find that it’s _highly_ profitable. As a student of all this, I’m fascinated; it’s the livin’ of it which may be a rocky road down which to walk, but.
Excellent analysis, Richard!
As a longtime dollar-bear and Euro-bull, I find it uncomfortable arguing against continuation, but one should be wary be too dogmatic. European broad money growth is far more robust than the US, European real estate prices (UK, Fr, Neth, Spain, Ireland) are far more overvalued than US relative to incomes; EU merchandise trade deficits are widening at a much quicker pace vs. mercatile asia whereas US has certainly passed the hump, and the USD in terms of what it buys is absurdly cheap vs. well…errrr….everything, save the Argentinian currency, not to mention that home bias of more US investors is more advanced than EU – i.e. investors have ALREADY fled the currency, whereas Euro area savers have yet to catch the bug wholesale. Moreover USD remains below USD/Euro high-water mark depsite nearZIRP in USA which says a lot about the way the leveraged market WAS positioned before the deleveraging began in earnest. Moreover, it is likely that when the scale of recession in US becomes apparent, contagion contemplated, and the implosion of o/heated, o/valued EU property markets comes-a-cropper, and ECB moves to moderate policy (note: coming soon!) , USD/Euro will likely to return to a moderate level of undervaluation from current extremes – say 1.30s.
One can argue abnout whether the US will ever find the political will to do anything, and that’s a valid debate, but with merch trade gap moving in right direction all the coulds, woulds, and shoulds remain in the realm of possibilty in the US, should the US finally find the religion of an energy policy, more consumption-oriented revenue-raising regime, diminishiment of military spend, and socialization of some of the biggest economy-wide drags such as healthcare.
According to the globalization proponents, like Marty Feldstein, etc, the fretting over the humbled dolla is a tempest in a tea cup. Why, it actually puts the US in the drivers seat come the recession cause we can export our way to prosperity.
The currency manipulation schemes, er pegs, are coming home to roost with inflation heating up via commodity inflation across the world. Maybe the US will become the new destination for “platform corporations”. Is Stephen Roach’s violent rebalancing finally at hand ?
Naw, the central banks will just supply liquidity for US consumers to borrow and the financial wunderkind will securitize the debt into high quality instruments and the government will cut taxes and take a powder on regulation and all will be just fine.
Spain and the UK especially, Ireland, the Netherlands, and France definitely have overvalued re. Germany doesn’t, Scandinavia not severely, and the newcomers not at all. It’s hard to make the case that property in Europe is as totally screwed as in the USA. Sure, Europe is going to take a hit; not one as severe however. Sure, ECB rates will come down—not as much as in the US. It is very telling to me that Ben Bernanke and all the heavyweights at Treasury were _unable_ to get a global interest rate cut and had to act unilaterally. This is something really not discussed but speaks as a huge vote of no confidence in both the dollar and our crisis management plan _by everyone else_. The ECB looks like nervy old hands while we look like patzers going asswards down the staircase.
I think the argument that lack of integration in the European bond markets and bank regulatory regimes is a significant structural limitation is the strongest one against the euro having the solidity to function as an international reserve currency. I definitely think _these_ limitations can be solved much more quickly then the US can get socialized health care, and energy policy, a reformatted mortgage market, and a personal savings rate. I don’t think we’ll get all of the latter group in the next ten years; we may get _none_ of the latter group in the next ten years.
A prime reason to me why I doubt that the $ will get to $1.30 is that the probable severity of the financial crack-up we can reasonably expect will preclude that sate of health. Yes, yes, reasoning by _past trends and conditions_ things should squeak through: I think we have had a sea change, not a price change.
Here’s something else to think about: if capital does flee the $ (maybe it doesn’t but if it does) capital flows into the euro change the context for Europe to deal with its own economic downturn and account deficit issues. If capital doesn’t move out of the $, yes we’ll see more of what we had before, sort of. That’s the big if. I wouldn’t bet on the hand we hold, is all I’m saying. Oh, and we don’t seem to know how to play this game anymore, either.
In an environment of rising Euro, the underlying components of that environment would dictate higher asset prices (by defination, a higher interest rate on that currency).The inflationary response from the EUR CB would be to raise interest rates to stem inflation, that would increase EUR/USD. I don’t see a 1:1 relationship between the US housing crisis and the EUR housing crisis because there is at least a stronger practical underlying reason for stronger Euro housing prices, a stronger underlying Euro.