Business | Economy
Dollar's turnaround: Too early to celebrate
When does a squiggle on a graph become a noticeable trend? Such is the question currently exercising the minds of those praying for an end to the dollar's long slump - not least among them the central bankers of the GCC.
- By Oliver Cornock, Special to Gulf News
- Published: 23:51 August 22, 2008
When does a squiggle on a graph become a noticeable trend? Such is the question currently exercising the minds of those praying for an end to the dollar's long slump - not least among them the central bankers of the GCC.
The past week has given them some cause for hope. August 19 saw the dollar hit a nine-week high against the yen despite the Fed holding interest rates steady at two per cent (some analysts had been hoping hawkish members such as Philadelphia Fed President Charles Plosser might have pushed rates up). The dollar hit highs of 109.99 against the yen, while picking up to $1.857 against an increasingly ailing sterling. Against the euro the dollar came close to $1.47 - also a nine week high.
The dollar's rally coincided with further falls in the price of crude. Brent sank to $112 - not seen since early May, while WTI (West Texas Intermediate) similarly slipped below $120 for the first time this summer. The news led most analysts to comment that falling oil has now becoming the dollar's leading support, yet there is a degree of mutual reinforcement: a stronger dollar will also bring down the price of oil, knocking some of the speculative air out of the market along the way.
This is all to the good for the global economy: consistently high energy prices were raising the ugly spectre of stagflation in the West (a situation where inflation and zero growth occur in tandem), and offering central bankers few policy options. Likewise, the GCC has struggled with the weak dollar for much of 2008 - contributing to record levels of inflation across the region, and leading to endless, crippling speculation over potential de-pegging or revaluation.
Squiggle
The important question now is whether the current resurgence of the dollar is part of a longer term trend, or just another squiggle on the chart. Two new pieces of information suggest the former. Recent figures from the US show that, despite the downturn, productivity has grown 2.5 per cent this year, compared to average growth of 0.8 per cent during previous downturns since 1970. By comparison, the effect of the crisis on the euro zone now looks worse than expected: 14 out of 15 euro zone economies saw contraction in their manufacturing sectors during July, with only Germany experiencing modest growth.
This means further strengthening of the dollar against the euro is now more, rather than less, likely. The dollar has in fact been keeping pace with the euro for a couple of months now, hitting the bottom of the trough in early April and holding fairly steady since. A less positive outlook for Europe, coupled with a more positive outlook for the US, could see the dollar recovery extend into a rally (though it should be noted the greenback would need to gain some 20 cents to return to pre-credit crunch levels).
Analysts should know by the end of August whether the dollar's tentative recovery will extend into truly bullish sentiment. For the meantime though, the combined result of the Fed's monetary policy and Saudi Arabia's opening of its taps has at least given the GCC some breathing space - speculation about revaluation should thus recede into the background for the time being.
Be prepared, however, for further shocks along the way: the effects of the credit crunch may be gradually working their way through the system, but the secondary effect of $147 a barrel oil is, if history is anything to go by, still around the corner.
The writer is Middle East specialist, Oxford Business Group's Regional Editor in the GCC.
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