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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerCase in point: currency analysts and traders expect the U.S. dollar to rise versus major currencies this year, despite declining short-term interest rates in the United States. The statement appears to be a contradiction, given that the No. 1 factor in a currency's strength is its interest rate. High interest rates attract money and drive a currency higher versus currencies with lower interest rates, all other factors being equal.
However, interest rates, while the most important factor, are not the only factor affecting currency values. A nation's economic growth - - including prospects for growth - - also is a strong factor: stronger economies attract money, driving their respective currencies higher. Further, it's the latter that's leading analysts and traders to argue that the dollar should rise from its multi-year lows in 2008.
On Monday afternoon the dollar was mixed against the world's major currencies, falling about one-quarter cent to $1.4821 versus the euro and about 1 cent to $1.0732 versus the British pound. The dollar rose 0.25 yen to 106.72 against Japan's yen.
Shift in psychology
Independent currency trader Andrew Resnick, formerly of Next Capital of New York, told BloggingStocks Monday that foreign exchange market psychology has shifted from "the woe is the dollar tone" that characterized the markets in 2006 and 2007.
"There's the sense now that the U.S. Federal Reserve has done what it takes to both shorten the recession and support economic growth. The mood now, if not the initial data, suggests that we're going to see the U.S. economy start to recover in the second half of 2008. That means dollar-based U.S. assets will regain appeal, leading to money flows into the U.S., boosting the dollar," Resnick said. Resnick added that he was flat, or had no open currency positions, on Monday
Analysts with BNP Paribas agreed with Resnick. 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 News tracks, Bloomberg News reported Monday. The dollar will gain at least 9% versus the euro in 2008, BNP predicts.
Resnick added that in 2008 he expects the dollar to rise to about $1.36-$1.38 versus the euro and to $1.87-$1.88 versus the British pound. Further, while underscoring that he's not an economist, Resnick said the research and calculations he uses as the basis for currency trades do not project a U.S. recession continuing into 2009, but rather "see negative growth conditions lasting only two quarters in 2008, most likely Q1 and Q2."
Independent currency trader Andrew Resnick, formerly of Next Capital of New York, told BloggingStocks Monday that foreign exchange market psychology has shifted from "the woe is the dollar tone" that characterized the markets in 2006 and 2007.
"There's the sense now that the U.S. Federal Reserve has done what it takes to both shorten the recession and support economic growth. The mood now, if not the initial data, suggests that we're going to see the U.S. economy start to recover in the second half of 2008. That means dollar-based U.S. assets will regain appeal, leading to money flows into the U.S., boosting the dollar," Resnick said. Resnick added that he was flat, or had no open currency positions, on Monday
Analysts with BNP Paribas agreed with Resnick. 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 News tracks, Bloomberg News reported Monday. The dollar will gain at least 9% versus the euro in 2008, BNP predicts.
Resnick added that in 2008 he expects the dollar to rise to about $1.36-$1.38 versus the euro and to $1.87-$1.88 versus the British pound. Further, while underscoring that he's not an economist, Resnick said the research and calculations he uses as the basis for currency trades do not project a U.S. recession continuing into 2009, but rather "see negative growth conditions lasting only two quarters in 2008, most likely Q1 and Q2."
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