The dollar fell against the world's major currencies Wednesday -- and to a record-low versus the euro -- as widening fears of a U.S. recession prompted investors and traders to exit dollar-denominated assets.
The dollar fell about 1.5 cents to $1.5145 versus the euro before gaining back some ground to $1.5125 Wednesday at mid-day, after a series of data points suggested the U.S. economy continues to slow, which will invariably prompt the U.S. Federal Reserve to lower interest rates further to stimulate growth.
The dollar also declined about one-cent to $1.9907 versus the British pound, and fell about 1 yen to 106.35 yen versus Japan's yen.
Independent currency trader Andrew Resnick, formerly of Next Capital of New York, told BloggingStocks Wednesday the factors that have led to a three-year decline in the dollar have accelerated in the past week.
"We have an oil price above $100 per barrel with investors piling into it as an inflation hedge. That hurts the dollar two ways. It takes money out of U.S. assets and by boosting oil's price, it increases the trade deficit, which is bearish for the dollar," Resnick said. "Also, the January durable goods order report was bearish, which means the Fed [U.S. Federal Reserve] will cut rates once, maybe twice more, which will lead investors to choose higher-interest-rate currencies."
Tough times for the dollar
The dollar has fallen about 12% versus the euro in the past 12 months. Resnick said the greenback may receive some support later this year if the European Central Bank begins to lower interest rates if euro-zone grow slows due to the sluggish U.S. economy. Otherwise, the task of reversing the dollar's decline will "rest with the politicians, and the public," he said. If not, by year's end the dollar will likely fall to $1.60 versus the euro and to $2.05 to $2.10 versus the British pound, he said.
"There are no easy solutions to stem the dollar's slide. The U.S. has to eliminate its $200 billion budget deficit. If the economy stalls, the budget deficit will rise. The U.S. also has to lower the trade deficit. It's narrowed recently, but oil imports are still way too high. Americans also have to save more and consume less," Resnick said. "Again, they're not easy tasks, but that's what needs to be done to stabilize the dollar." Resnick added that he is presently flat, or has no open currency trade positions.
Resnick added that the falling dollar has one benefit: it makes U.S. goods cheaper for foreign purchasers, and that's boosting exports, but long-term the net benefits of a weak U.S. dollar are negative for the U.S. economy. "The biggest concern is the ability to attract foreign investors for U.S. investments. If foreign investors know that by buying a dollar-denominated asset they're going to automatically lose about 10% a year, just due to a falling dollar, you can see how that might encourage investors to look elsewhere."
Two ways to cut the U.S. Government's budget deficit involve raising taxes and/or cutting spending. Does Resnick have a preference?
"No comment. I'll leave that one for Congress and president to decide. That's not my territory," Resnick said. "That's why we have elections."
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Reader Comments (Page 1 of 1)
2-27-2008 @ 4:45PM
william lindblad said...
Mr Resnick is on the mark and I am sure that also knows the possible consequences. When the Euro hit 1.48 parity it was expected that lay-off's would begin in Europe, and this is now a fact. I expect that it will reach 1.60+ and that will further pressure the continent economy towards more labor force reduction. When the Euro central bank intervenes by cutting rates it may be too little, too late.