Business | Economy
Wagering against US dollar rebound may not be over yet
A theme that has dominated currency trading since 2004 is the falling dollar. In that time, it has fallen more than 6.5 per cent to record lows, according to an index that tracks the greenback's performance against six major currencies.
- Gulf News Report
- Published: 00:36 January 1, 2008
A theme that has dominated currency trading since 2004 is the falling dollar. In that time, it has fallen more than 6.5 per cent to record lows, according to an index that tracks the greenback's performance against six major currencies.
Investors have been betting on currencies where interest rates are expected to rise and wagering against currencies with falling rates.
This had led to the dollar's decline. Analysts say investors were unlikely to completely abandon that strategy just yet.
Lower interest rates have reduced the appeal of dollar-denominated assets, helping to further undermine the greenback against major currencies.
Since mid-September the Fed has cut its benchmark overnight lending rate by 75 basis points to 4.50 per cent in a bid to shield the broader economy from the housing market turmoil.
"Lower interest rates in the US are not going to be positive for the dollar. We look for the growth picture in the US to improve as the housing market bottoms out in the first half of (this) year," said David Powell, currency strategist at IDEAglobal in New York.
"The prospect of the higher rates in the second half of (this) year as a result of higher growth will lead to the dollar's recovery. We view interest rate differentials as a larger determinant of exchange rate movements than growth differentials."
Opinions differ, however.
"The outlook for lower rates is seen as somewhat positive for the US dollar. The demand for US equities also fuelled by expectations of lower interest rates has helped to spark some demand for the dollar," said Omer Esiner, a forex analyst at Ruesch International in Washington.
"It is interesting to see the first signs that people are talking about a rate cut now being good news for the dollar. That seems to be the cyclical story for 2008," said Chris Turner, head of FX strategy at ING Capital Markets in London.
"That's one of the reasons that we have a $1.38 forecast for euro/dollar (this) year. That's based on the fact that equity flows are going to favour the United States over the euro zone because higher inflation and slowing growth … not really a good place to have your money."
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