True, the dollar was holding its own Thursday at mid-day against the world's other major currencies, and the Dow was up about 250 points to 11,077 in what some called a 'euphoria rally,' but caution remains the order of the day, regarding the dollar, so says currency trader Andrew Resnick.
"There are still too many unknowns regarding the bailout bill to make an informed conclusion regarding the dollar's prospects at this juncture, so the best stance is standing aside," Resnick said. He added that he was presently flat, or had no open currency trading positions.
For the record, the dollar was slightly higher, up about one-half cent to $1.8401 versus the British pound, but down a quarter-cent to $1.4645 versus the euro. The greenback was also up about one-half yen to 106.56 versus Japan's yen.
The above moves are "statistically insignificant," given the basket of fiscal, monetary, financial sector, and economic unknowns relating to the United States economy, Resnick said.
"We won't know the dollar's fate until we know how much money the U.S. Treasury will spend, in what increments, its primary method of funding, what assets it will buy and at what prices, and how much money the [U.S.] government will have left to deal with other issues," Resnick said. "These are enormous issues, so the situation will remain clouded until we know more."
With the aforementioned as a backdrop, Resnick outlined two dollar scenarios:
Scenario A: The bailout plan is approved. A modest, initial euphoria rally for the dollar, followed by the sobering reality that the bailout will, at least short-term, almost certainly increasing borrowing by the U.S. Government. More debt. More dollars in circulation. Higher Inflation. Outcome: Dollar lower.
Scenario B: The bailout plan is defeated. The financial crisis worsens, the credit markets freeze-up, banks hoard capital and stop most lending, corporations can not conduct commerce without short-term capital, the U.S. and global economies slow further, to recession levels. Capital preservation and safety are the orders of the day. Outcome: Dollar moderately higher, on a flight to safety.
Hence, given the likelihood of the bailout bill's approval, Resnick is skeptical of any dollar move higher, or of a sustained dollar rally.
But Resnick underscored that he doesn't "have any money backing up that stance, at least not right now."
Forex / Economic Analysis: Forewarned is forearmed. Stand aside, for now. Still, given poor economic fundamentals, and a gargantuan U.S. budget deficit, it's hard to make a case for the dollar strengthening, in the quarters ahead.
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