DJ Forex Focus
Crisis For Dollar Bulls Won't Last Long. By Nicholas Hastings
As U.S. Labor Day looms and post-summer trading gets underway in earnest, dollar bulls will face a crisis of confidence - but not for long.
Assumptions that have kept the dollar supported for much of the summer are likely to end - casting doubt on where the U.S. currency will head from here.
For most of the last few weeks, currency investors have been driven by the decline in global stock markets as well as the safe haven role of the dollar.
But now, both of these factors are in doubt.
The Shanghai Composite Index, for example, has already lost 50% of the gains it made since October last year. About 22% of that fall came in the last month or so, suggesting that the market may well have discounted efforts to slow the Chinese economy.
In the meantime, more evidence of a global economic recovery could mean an end to the dollar's safe haven role.
"The time of hectic strategic reallocations is likely to be over," is how the currency strategy team at Commerzbank put it.
In other words, the performance of equity markets may no longer matter so much.
As the flow of data from most major economies continues to provide evidence of third-quarter expansion, even if it isn't as robust as the second quarter, expectations of monetary tightening will rise.
Some experts are already concerned that the record low interest rates and high levels of liquidity provided to ensure a recovery are now looking too aggressive and could well raise concerns about inflation in coming months.
For stocks, this is hardly good news as expectations of higher borrowing costs will mean an end to the recent period of cheap money that have helped keep many companies afloat.
Under the circumstances that have prevailed in recent weeks, such a development would probably have proved good news for the dollar - with any decline in stock prices being taken as evidence that the global appetite for risk is falling and that safe havens are the preferred currencies.
However, these safe haven flows may well come to end.
As investors return to the markets after the summer holidays, their fears over the credit crunch should have passed, making it more likely that any fresh investment decisions will now be taken on the more traditional basis of interest rate differentials now that the global economy is more likely to return to normal.
With the U.S. still likely to be the first major economy to pull itself out of recession and to exit its quantitative easing strategy, this could well mean that the dollar could find itself back in favor even faster than the dollar bulls expected.
Early Thursday, currencies continued to be bounced around by data and equities in equal measure. Wednesday's news that U.S. private sector jobs had fallen more than expected last month - by 298,000 rather than 213,000 according to ADP - initially pushed the safe haven dollar and yen higher.
However, as Chinese shares rebounded strongly, with the Shanghai Composite Index rising 5% on talk that initial share offerings will be suspended for a few weeks, these moves were reversed.
By 0645 GMT, the dollar was up at Y92.39 from Y92.13 late Wednesday in New York, according to EBS. The euro was up at $1.4293 from $1.4265 and at Y132.07 from Y131.44.
Assumptions that have kept the dollar supported for much of the summer are likely to end - casting doubt on where the U.S. currency will head from here.
For most of the last few weeks, currency investors have been driven by the decline in global stock markets as well as the safe haven role of the dollar.
But now, both of these factors are in doubt.
The Shanghai Composite Index, for example, has already lost 50% of the gains it made since October last year. About 22% of that fall came in the last month or so, suggesting that the market may well have discounted efforts to slow the Chinese economy.
In the meantime, more evidence of a global economic recovery could mean an end to the dollar's safe haven role.
"The time of hectic strategic reallocations is likely to be over," is how the currency strategy team at Commerzbank put it.
In other words, the performance of equity markets may no longer matter so much.
As the flow of data from most major economies continues to provide evidence of third-quarter expansion, even if it isn't as robust as the second quarter, expectations of monetary tightening will rise.
Some experts are already concerned that the record low interest rates and high levels of liquidity provided to ensure a recovery are now looking too aggressive and could well raise concerns about inflation in coming months.
For stocks, this is hardly good news as expectations of higher borrowing costs will mean an end to the recent period of cheap money that have helped keep many companies afloat.
Under the circumstances that have prevailed in recent weeks, such a development would probably have proved good news for the dollar - with any decline in stock prices being taken as evidence that the global appetite for risk is falling and that safe havens are the preferred currencies.
However, these safe haven flows may well come to end.
As investors return to the markets after the summer holidays, their fears over the credit crunch should have passed, making it more likely that any fresh investment decisions will now be taken on the more traditional basis of interest rate differentials now that the global economy is more likely to return to normal.
With the U.S. still likely to be the first major economy to pull itself out of recession and to exit its quantitative easing strategy, this could well mean that the dollar could find itself back in favor even faster than the dollar bulls expected.
Early Thursday, currencies continued to be bounced around by data and equities in equal measure. Wednesday's news that U.S. private sector jobs had fallen more than expected last month - by 298,000 rather than 213,000 according to ADP - initially pushed the safe haven dollar and yen higher.
However, as Chinese shares rebounded strongly, with the Shanghai Composite Index rising 5% on talk that initial share offerings will be suspended for a few weeks, these moves were reversed.
By 0645 GMT, the dollar was up at Y92.39 from Y92.13 late Wednesday in New York, according to EBS. The euro was up at $1.4293 from $1.4265 and at Y132.07 from Y131.44.
3 September | 
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