The comeback of the beleaguered dollar continues.The dollar strengthened to a six-month high versus the euro Tuesday, and also rose against the world's other major currencies on a growing consensus in foreign exchange circles that global economic fundamentals are shifting in favor of the greenback.
The dollar strengthened about 1.5 cents to $1.4465 versus the euro, and about 1.4 cents to $1.7877 versus the British pound Tuesday at mid-day. The buck also gained one-half yen to 108.62 versus Japan's yen.
Pivotal for dollar: Europe, Asia GDP
Further, although Tuesday's dollar catalyst was the realization that Hurricane Gustav would cause considerably less-than-forecast damage to Southeast U.S. oil production and the refinery infrastructure, trader Andrew Resnick told BloggingStocks the longer-term focus remains regional GDP growth.
"With Hurricane Gustav out of the way, sentiment's building that this dollar rally has legs. European growth has slowed to recession levels, and China's economy has slowed as well. For Europe, lower interest rates are likely to follow, and that's dollar bullish," Resnick said. Resnick added that he expects the Bank of England to cut its benchmark interest rate by a quarter-point to 4.75% when it meets September 4. He doesn't expect the European Central Bank to lower its 4.25% refinance rate on September 4, but that stand-pat policy may change to accommodation, later this fall.
Further, Resnick said the dollar is being bolstered by two other factors: a declining monthly U.S. trade deficit and the reduced appeal of commodities as an asset play. "The trade deficit is falling in real terms, after factoring out the increase in oil prices, and that trend will likely continue on decent export totals in Q3. That's bullish for the dollar," Resnick said. "Also, the bloom appears to be off the commodity rose with traders now seeing the risk of certain commodities as assets. Owning a commodity is no longer a riskless proposition, and that's also boosting the dollar." Resnick added that he is presently flat, with no open currency trading positions.
Another fundamental that could shift in the dollar's favor, given the right the circumstances? A declining U.S. Government budget deficit, Resnick said. "The thinking in the market now is that if Congress can limit the growth of the deficit by either spending cuts and/or tax increases, that will inspire more confidence in the dollar," he said.
Economic Analysis: The health of the U.S. economy and additional federal spending to assist Fannie Mae (NYSE: FNM) or Freddie Mac (NYSE: FRE) are two other factors that will influence the dollar's value. A stronger U.S. economy and only a modest Fannie/Freddie bailout package would be dollar-bullish; the reverse, dollar-bearish.
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Reader Comments (Page 1 of 1)
9-02-2008 @ 9:00PM
Peter said...
Is there any doubt why the dollar is rallying? We do have an election in November, Remember?
9-02-2008 @ 10:14PM
kcoryms said...
The dollar rally may have legs? Let me put it this way. The dollar is Nancy Kerrigan and Freddie/Fannie is Tonya Harding with a club.