Betting On Dollar Fall Now Is A High Risk. By Nicholas Hastings
Selling the dollar too heavily now could be a high risk strategy.
There are certainly many reasons to do so.
G7 finance ministers failed to give the U.S. currency any serious support at their Istanbul meeting last weekend; risk appetite remains firmly in the driving seat and the Reserve Bank of Australia's rate hike will only encourage optimism about the global economy.
However, don't rule out a rush back into the safe-haven dollar.
Later Wednesday sees the start of the U.S. third-quarter earnings season - a time that is fraught with downside risks given the stumbling U.S. economic recovery.
The euphoria that has been driving global equity markets steadily higher in recent weeks could well disappear, ensuring that support for the dollar returns.
Some economists, such as those at UBS, are warning of massive selloffs in equities if earnings disappoint, especially given that some forecasters have been raising their predictions for the S&P 500 by the end of the year.
Meanwhile, the RBA's decision to hike rates by 25 basis points, making it the first G20 central bank to raise rates since the start of the credit crunch, will make the market more conscious of any exit strategies elsewhere as investors start to bet that the global recovery is finally here.
The trouble is that Australia is a special case and rates elsewhere won't be following suit.
The Aussie recession has been much milder, the country was well placed to benefit from a rise in Chinese demand for commodities and the Australian government itself responded aggressively to the downturn, immediately pumping billion of dollars into the economy.
On top of that, Australian banks didn't suffer from the exposure to sub prime and other toxic assets that have made the credit crunch so acute elsewhere.
It isn't surprising that the RBA has been first to essentially declare the end to Australia's credit crunch. Economists forecast the central bank could even raise rates again before the end of this year.
But other major economies will follow far behind.
Economic data from most remain highly mixed, with any evidence of a serious upturn often quickly followed by data suggesting just the opposite.
Even optimists, such as James Knightley, a senior economist at ING Financial Markets in London, who points to the recent spate of firm purchasing managers' surveys, recognize that exit strategies elsewhere are some way off.
"Interest rates are unlikely to rise in the U.S., euro zone and the U.K. until the second quarter of 2010 at the earliest," Knightley said.
As this view filters through to the global investment community and uncertainty over the global recovery rises once again, safe havens will once again be in favor - ensuring that the U.S. currency finds support.
Overnight the Australian dollar printed a fresh 14-month high of $0.8923 after the Reserve Bank of Australia's decision to hike rates by 25 basis points Tuesday. The price of gold rallied to a new all-time high of $1,045 an ounce.
However, overall market sentiment was negative with investors moving back into safe havens such as the dollar and the yen.
By 0645 GMT, the dollar had fallen to Y88.46 from Y88.76 late Tuesday in New York, according to EBS. The euro was more or less flat at $1.4723 from $1.4724 but down at Y130.25 from Y130.66.
There are certainly many reasons to do so.
G7 finance ministers failed to give the U.S. currency any serious support at their Istanbul meeting last weekend; risk appetite remains firmly in the driving seat and the Reserve Bank of Australia's rate hike will only encourage optimism about the global economy.
However, don't rule out a rush back into the safe-haven dollar.
Later Wednesday sees the start of the U.S. third-quarter earnings season - a time that is fraught with downside risks given the stumbling U.S. economic recovery.
The euphoria that has been driving global equity markets steadily higher in recent weeks could well disappear, ensuring that support for the dollar returns.
Some economists, such as those at UBS, are warning of massive selloffs in equities if earnings disappoint, especially given that some forecasters have been raising their predictions for the S&P 500 by the end of the year.
Meanwhile, the RBA's decision to hike rates by 25 basis points, making it the first G20 central bank to raise rates since the start of the credit crunch, will make the market more conscious of any exit strategies elsewhere as investors start to bet that the global recovery is finally here.
The trouble is that Australia is a special case and rates elsewhere won't be following suit.
The Aussie recession has been much milder, the country was well placed to benefit from a rise in Chinese demand for commodities and the Australian government itself responded aggressively to the downturn, immediately pumping billion of dollars into the economy.
On top of that, Australian banks didn't suffer from the exposure to sub prime and other toxic assets that have made the credit crunch so acute elsewhere.
It isn't surprising that the RBA has been first to essentially declare the end to Australia's credit crunch. Economists forecast the central bank could even raise rates again before the end of this year.
But other major economies will follow far behind.
Economic data from most remain highly mixed, with any evidence of a serious upturn often quickly followed by data suggesting just the opposite.
Even optimists, such as James Knightley, a senior economist at ING Financial Markets in London, who points to the recent spate of firm purchasing managers' surveys, recognize that exit strategies elsewhere are some way off.
"Interest rates are unlikely to rise in the U.S., euro zone and the U.K. until the second quarter of 2010 at the earliest," Knightley said.
As this view filters through to the global investment community and uncertainty over the global recovery rises once again, safe havens will once again be in favor - ensuring that the U.S. currency finds support.
Overnight the Australian dollar printed a fresh 14-month high of $0.8923 after the Reserve Bank of Australia's decision to hike rates by 25 basis points Tuesday. The price of gold rallied to a new all-time high of $1,045 an ounce.
However, overall market sentiment was negative with investors moving back into safe havens such as the dollar and the yen.
By 0645 GMT, the dollar had fallen to Y88.46 from Y88.76 late Tuesday in New York, according to EBS. The euro was more or less flat at $1.4723 from $1.4724 but down at Y130.25 from Y130.66.
- 7 October |
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