> Deanna wrote: > Ha! Like there's enough to share. > Here's some more Cassandra dollar analysis. Once again, I now own Euros which I traded for a loss to Yen last year. Let's see if I'll lose again this year:
The greenback's sinking feeling Jan 5th 2006 >From The Economist print edition The American currency made a weak start to the year, suffering its biggest two-day drop against the euro in two years. Its slide could be unexpectedly steep FOR Bill Gates, Warren Buffett and many Wall Street number-crunchers, the dollar supplied one of the nastiest surprises of 2005. The world's two richest men and most financial-market seers predicted that the greenback would fall last year, dragged down by America's colossal current-account deficit. Many forecasters were predicting that the euro would buy $1.40-odd by now and that a dollar would fetch less than ¥100. They were all wrong. Although America's current-account deficit headed towards $800 billion in 2005, the dollar rose. It was up by 3.5% against a broad trade-weighted basket of currencies, the first rise in four years (see chart). Against the euro and yen, the greenback did even better. It ended the year at $1.18 per euro, up by 14%. Despite a wobble in December, the dollar made a similar advance against the yen. Not surprisingly, the pundits are more cautious about 2006. Although most expect the dollar to end this year weaker than it began it, the typical forecast is that any decline will be fairly modest and take place mainly in the latter part of 2006. That is because most analysts attribute the dollar's recent strength to widening differences between American, European and Japanese interest rates. These gaps are expected to grow for a few more months before closing slightly later in the year. The Federal Reserve raised short-term interest rates eight times in 2005, to 4.25%. Japan, in contrast, kept the liquidity taps open and interest rates at zero, while the European Central Bank raised rates only once, in December, to 2.25%. Relatively higher American interest rates brought foreign capital pouring into dollar assets and pushed the currency up. By this logic, as long as America raises rates faster than others, the dollar will stay strong. But as America's tightening campaign levels off and European or (maybe) Japanese rates rise, the dollar will weaken. The consensus, according to a recent compilation of forecasts by the Reuters news agency, suggests that the dollar could reach $1.25 per euro and ¥108 by the end of the year. Judged by the first few days of 2006, those forecasts may prove too sanguine. The dollar suffered its biggest two-day drop against the euro in two years, and hit a two-month low of $1.21 against the European currency on Wednesday January 4th; it recovered some of the lost ground in early trading on Thursday. One reason for the dip is that investors are becoming jittery about how soon the interest-rate gap might stop growing. The dollar swooned after the release this week of the minutes of the Fed's December meeting, which suggested that short-term interest rates might not need to go much higher. An interest-rate gap that was merely stable ought to imply a weaker dollar. According to economic theory, it is the widening of interest-rate differentials that temporarily strengthens the exchange rate. Over time, an international difference in interest rates is offset by a drop in the currency with the higher interest rate. Financial markets may also have become too obsessed with the influence of interest rates on currencies. Historically, interest-rate differentials have been little more use than anything else at predicting short-term movements in exchange rates. And there are plenty of other reasons to worry about the dollar. One clear, albeit modest, source of support for the currency in 2005 was the one-off repatriation of American firms' foreign profits thanks to a one-year tax break. That is now over. Oil exporters may prove more fickle dollar buyers than many expect. In 2005, as oil prices shot up, exporting countries saw their external surpluses soar. A good slice of these petrosurpluses found their way into dollar-denominated assets. That led some analysts to conclude that oil exporters were a safe and lasting source of dollar support. An alternative view is that the exporters, like others, were attracted by rising American interest rates. A recent study by the Bank for International Settlements, for instance, suggested that the currency composition of OPEC members' deposits has become more sensitive to interest-rate differentials. China is yet another cause of uncertainty. Its eagerly awaited but ultimately minuscule exchange-rate shift in July 2005 was a boon for the dollar because it did not set in train a wider realignment of Asian currencies. This year the opposite may occur, with the Chinese allowing a bigger move in the yuan than markets expect. This week China introduced a system of marketmaking in spot yuan trading that could permit faster appreciation. But the biggest shadow remains America's huge and rising current-account deficit. Reducing this will, at some point, require a much cheaper dollar. According to Jim O'Neill of Goldman Sachs, fears over the current account lurked behind the scenes even in 2005. According to his models, interest-rate differentials alone suggest the dollar should be around $1.10 to the euro, or about 10% stronger than it is. He puts the discount down to nervousness about the current account. The real risk is that this nervousness takes centre stage just as the interest-rate gap fades. The result could be a sharp drop for the dollar. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~| Message: http://www.houseoffusion.com/lists.cfm/link=i:5:190615 Archives: http://www.houseoffusion.com/cf_lists/threads.cfm/5 Subscription: http://www.houseoffusion.com/lists.cfm/link=s:5 Unsubscribe: http://www.houseoffusion.com/cf_lists/unsubscribe.cfm?user=89.70.5 Donations & Support: http://www.houseoffusion.com/tiny.cfm/54
