Dollar vs. Euro Resfresher Course

From today’s IBD, a good refresher article on the U.S. dollar vs. the Euro and other currencies. Cheers!

Dollar Falls As Fed Nears End To Hikes; Europe, Japan Rise
Greenback’s Outlook Dim
Impact on stocks unclear, but deficits, diversifying, foreign strength spur shift

For greenback fans, it was a good run while it lasted.
After mocking the bears last year, steep declines in 2006 look like the real thing.
The greenback has fallen even in the face of strong economic data.
The dollar fell Tuesday even after a report late Monday that Federal Reserve chief Ben Bernanke told a CNBC anchor markets had misread last week’s comments as a dovish call on interest rates.
Steady Fed rate hikes kept the dollar strong despite huge and growing U.S. trade deficits.
But now the Fed seems to be winding down, other central banks are mulling rate hikes as their economies heat up and a one-year tax break that spurred U.S. firms to repatriate foreign profits is over.
The dollar has fallen 5.7% vs. the euro in 2006 to a 1-year low. It’s at a 3-month low vs. the yen.
“At some point the Fed is going to head to the sidelines and that is going to in effect remove one of the remaining pillars of support for the dollar,” said Ron Simpson, managing director of global currency analysis at Action Economics.
A weaker currency means higher prices for foreign goods — including oil — thus “importing” inflation and reducing the spending power for domestic businesses and consumers.
U.S. stocks could suffer. Investors might accelerate their buying of foreign stocks, taking advantage of a weak dollar boost to overseas returns.
But corporate profits may rise. U.S. exporters would benefit from a cheap buck. And overseas profits would rise in dollar terms.
A soft dollar could also curb demand for Treasuries — and thus weaken the dollar further and so on. That’s worrisome given the U.S.’ need to fund a current account deficit that has swelled to a record 6.4% of GDP.
Mix in renewed worries over global imbalances by a chorus of economists and pundits, and it looks like headwinds for the dollar are only likely to get stronger.
The Group of Eight nations late last month recommended developing nations — read China — narrow trade surpluses by letting their currencies rise.
“The market has brought the global imbalances back to the center of the radar screen,” Simpson said.
Talk of central banks shifting into nondollar assets is also weighing heavily.
Oil-rich Qatar has said it will shift some reserves to euros. Russian officials noted at the latest G-8 meeting that the dollar is no longer “the universal and absolute reserve currency.”
Sweden also plans to move some reserves into euros. Its holdings are relatively tiny, but traders fear such sentiment could spark a broader trend.
Meanwhile, talk of rate hikes in improving Europe and Japan also is undercutting the dollar.
The European Central Bank has hiked rates twice in recent months to 2.5%. While it may stand pat Thursday, a June hike is likely.
The Bank of Japan’s recent decision to end its ultraeasy policy has spurred talk as to when the BOJ will lift rates from 0%. That likely won’t happen soon, though.
Another big question is the huge — if murky — amounts of petrodollars circulating the globe due to record oil prices.
From the Mideast to Russia, oil paid for in dollars has helped prop up the currency. Any move by oil producers into nondollar assets would sink the currency further.
So would any move by large central banks, specifically China or Japan, to spread out their assets. Mounting pressure on China to reverse its record trade surplus with the U.S. by letting the yuan rise remains a hot issue for Congress.

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