US Dollar: 5 Reasons It Will Not Hit a New Low
Despite the prospect of a rate hike from the European Central Bank, here are 5 reasons why I do not expect the US dollar to hit a new record low against the Euro:
1) Tug of War Between Bernanke and Trichet
Fed Chairman Ben Bernanke and ECB President Trichet appear to be competing for the Title of Most Hawkish Central Banker. Both Bernanke and Trichet have repeatedly warned the markets that inflation needs to be their number one focus. On a near-daily basis, we have heard fresh hawkish comments from either themselves or their cohorts. And their message is growing stronger by the day. With Mishkin’s resignation, the balance of FOMC board members now shifts towards hawks. The tug of war between the ECB and the Fed will make it difficult for the EUR/USD to break out of its 1.5350 to 1.5850 price range.
2) Current Economic Data
Furthermore, in both the US and the Eurozone, we have seen improving economic data. Yes, non-farm payrolls on Friday was very weak, but at the same time, earlier this week, pending home sales increased significantly. The service and manufacturing sectors are also showing signs of stabilization. As for the Eurozone, the German trade surplus increased more than expected due to a surge in exports while industrial production rose in both France and Italy. With economic growth failing to spiral give both central banks the flexibility to focus on inflation.
3) Outlook for Growth
The outlook for both US and Eurozone growth are both uncertain. Oil prices and a weak labor market are expected to prevent a major recovery in the US economy. As for the Eurozone, the yield curve for German government bonds has now inverted. The 2-10 spread turned negative for the first time since 2000. In the past, inversion of 2-10 spread is a strong leading indicator of serious downturns and recessions.
4) Speculators are Indecisive
The FXCM Speculative Sentiment Index, which measures the positions of the firm’s most speculative clients, has also been flipping from negative to positive over the past week, which is a strong sign of indecision and a confirmation that range trading dominates in the EUR/USD for the time being.
5) G8 Meeting and EU Referendum
And finally, the EU Referendum on Thursday and the G8 Meeting this weekend should prove to be non-events. Even though a change in the currency portion of the communique (or intervention) was originally expected, an official indicated this morning that currencies will be discussed but won’t necessarily be mentioned in the communique. The EU Lisbon Treaty, on the other hand, is far less important than the EU Constitution that was eventually rejected in 2005. If Ireland votes No on Thursday, the best we will see is mild Euro weakness.
For these 5 reasons, I do not expect the EUR/USD to break out of its range or hit a new record high anytime soon.
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This article has 20 comments:
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User 206418
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1 Comment
Jun 11 05:21 PM-
Ernest Wong
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7 Comments
My Website
Jun 11 05:28 PM-
W.C. Varones
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24 Comments
My Website
Jun 11 06:37 PM-
SW Richmond
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392 Comments
Jun 11 06:41 PMI don't mean to be rude, but this is positively the most stupid comment I've read in at least a week. Bernanke merely says he might raise rates, in a few months, and in your book he's an inflation hawk? And in response to his comments, the US market, which has become addicted to cheap money as the only reason for hope in forward earnings, tanks, and oil calls his bluff and goes to the moon anyway. If Bernanke actually raises rates Wall Street will panic. Lehman is circling the toilet right now, so the Fed has to prepare to crap another big chunk of change at Morgan or Goldman to pay for the hostile takeover. The ABX indices are at all-time lows. The bond insurers, already broke, have been downgraded, and the demand for claim payments is just now beginning.
The increase in pending home sales is bank REO activity. Duh. Bernanke has absolutely NO ability to do anything about domestic inflation. He is trapped.
I am sincerely glad that you are not betting any of my money on your expectations.
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icandoitdon
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408 Comments
Jun 11 08:41 PM-
yuman
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27 Comments
Jun 11 09:11 PM"I do not expect the EUR/USD to break out of its range or hit a new record high anytime soon. " If would be helpful if you were more specific about the timeframe, days, weeks, or months.
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jackh
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36 Comments
Jun 11 10:08 PMWith all due respect to Ms. Lien, I don't think she has lived through the 70's when the banker really could be described as hawkish...
Wait for another shoe to drop......
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icandoitdon
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408 Comments
Jun 11 10:54 PMi lived through the 70s too. i long for the days of anyone on the fed to show the courage that paul volker had. he was a tough guy who made us take the medicine we needed to take. bernake couldn't carry his water.
having said that, bernake inherited a near-impossible situation from his idiot predecessor. the mistake he's made, in my view, is believing that exceedingly low interest rates would solve the housing problem, which it hasn't and won't. he ended up with a currency problem, a commodities problem, an inflation problem and a credibility problem instead. bad trade.
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icandoitdon
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408 Comments
Jun 11 11:00 PMlow rates were also designed to rescue the stupid bankers who threw good money after bad as housing reached unsustainable heights. he should have let them eat their own cooking. those who could issue new capital would survive. but he didn't want to have the stigma of major bank failures on his watch. the irony is that he could end up with that anyway.....
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dougnhi
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34 Comments
Jun 12 12:07 AM-
Coelacanth
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77 Comments
Jun 12 12:57 AMThe real question for me is how heavy an impact ultimately will the continuing, relentless erosion of household wealth be on consumer spending. IMO this is the key.
I gotta tell ya.....as sanguine as some in the market are about there not being any fresh dollar weakness, I'm just not as sanguine. I just don't think we've yet felt the full impact housing & credit will have on U.S. economic fundamentals (not to mention inflation and rising unemployment).
That said, given the the extraordinary measures our Fed has taken to stave off financial panic....its not a stretch at all that currency intervention would happen if the buck were to resume it's earlier death plunge.
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Aly-khan Satchu
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20 Comments
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Jun 12 01:08 AMHaving said that, the US real curve is now steepening. This will add some spine to the $. Short term rates currently are subsidising the Banks thats for sure but long term rates are taking cognisance of the more hawkish rhetoric.
Sentiment [as witnessed by the other comments] is so utterly negative that purely on that basis, the elastic is stretched way too far.
Aly-Khan Satchu
rich.co.ke
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bigbernardo
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1 Comment
Jun 12 01:31 AM-
bbzz24
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245 Comments
Jun 12 02:40 AMdoes anyone expect helicopter ben to be piss off the politicians who appointed him? i do not. so dont expect significantly higher rates, a 1/4 or 1/2% will have no real impact on the economy as the problem is the return of principal not the return on principal as bill gross puts it. the economy has to deleverage first and that will lead to price deflation in all non productive assets and inflation will continue in commodities whose supply the government cant control.
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BigBurton
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1 Comment
Jun 12 08:07 AMa bank or brokerage failure away from new lows on the dollar.
Bernanke only understands cuts, the rest of his academic stockpile
is wasted on him. He ignored all his naysayers fraught with fears of
inflation, well lookie, we got inflation!
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Martin Lowenthal
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42 Comments
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Jun 12 09:46 AM-
David Roskoph
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115 Comments
My Website
Jun 12 11:32 AMTrichet is petty and using this opportunity to rub our noses in the fiat factory that has fueled everyone's (including his) growth.
Bernanke is probably not sleeping well knowing that if his bluff is called (about not lowering rates further) and the dollar plummets, he'll ignite worldwide stagflation.
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EUARTE
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61 Comments
Jun 12 11:50 AMWhat are we getting? We are getting a weaker sick dollar, inflation and the banks are still in big trouble and politicians who have not the slightest understanding of what is going on......and obviously don't care.
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flow5
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417 Comments
Jun 12 03:36 PMThe excessive dollar balances aquired by foreigners (excessive in terms of trade) led to the formation and growth of the prudential reserve E-dollar banking system (the discovery that the amount of actual U.S. dollar reserves required to support the E-D banks’ convertibility commitment need be only a fraction of the volume of E-D loans made – and E-D deposits (money) created.
This unregulated system (no legal reserves, only liquidity reserves) has been allowed by the governments and central bankers of the world to create in excess of ??? trillion new international units of account. This deluge of international money has imposed excessive inflationary pressures on world prices.
A weak currency is not a cause; rather it is a symptom of a weak, noncompetitive economy. The real culprit seems to be the cost of our products relative to their quality. Inferior is not a good buy at any price. The problem is that further depreciation of the dollar will not correct our foreign trade deficit.
If it is assumed that the U.S. Government will persist in multibillion dollar unilateral transfers to foreigners and that the trade deficits, even though reduced from present levels, will continue; the future course of the dollar will be down, unless the payments gap is filled by foreign investment.
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the final horseman
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87 Comments
Jun 13 04:56 AMstatistics can prove anything....'a man drowned in an average of six inches of water'...i suppose its possible if he was unconsious and face down...or someone stood on his head
perhaps our mz author played ostrich in a river.
personally, i dont see why the markets react positively to a bunch of lies and B.S. (and i dont mean bachelor of science here)
the dollar is suspended in mid air... held up by a foundation of sand OR the updraft of a helicopter.
cant wait NOT to read bennie's memoirs...wonder if he will blame big al
hahahahahaha