Stocks May Drive
Dollar's Direction
By DAN MOLINSKI
October 22, 2007; Page C4
It is an either-or scenario for the dollar this week, with the currency likely to either fall against the euro and rise against the yen, or rise against the euro and fall against the yen.
U.S. and global stock markets are likely to play the main role in the path the dollar takes, especially after a meeting Friday by finance ministers from the Group of Seven leading nations didn't provide surprises.
The final draft of the G-7's postmeeting statement said exchange rates should "reflect economic fundamentals" and that "excess volatility and disorderly movements" are undesirable. Such remarks are typical postscripts to G-7 meetings.
As expected, the statement didn't specifically mention the dollar's weakness or the euro's strength. On the surface, this sets up the dollar to continue its descent against the euro this week.
Two Sides of a Rate Cut
The dollar could plumb new depths on expectations of further U.S. economic weakness and likely interest-rate cuts by the Federal Reserve. This scenario could boost the dollar against the yen, however, as rate-cut expectations might help the U.S. stock market rebound from last week.
On the flip side, if stocks continue to suffer this week, risk aversion could quickly become the driving force in currencies. This would allow the dollar to reverse some of last week's losses against the euro, as investors would likely pull out of their riskier bets on the euro and other higher-yielding currencies funded by the yen, or in some cases by the dollar. The dollar would likely fall versus the yen if stock markets keep ticking lower -- because risk aversion typically benefits the yen.
Tricky Week
"The question is, 'Which forces are going to dominate? Investors' sentiment and risk aversion, or rate expectations?'" said Rebecca Patterson, global currency strategist at J.P. Morgan in New York. "The problem is that investor sentiment is constantly shifting."
Against this backdrop, currency analysts said the euro could range from $1.4175 to $1.4375 this week, while the dollar could trade from 114 yen to 116 yen.
Tom Levinson, vice president of foreign-exchange strategy at ING Wholesale Banking in London, said the dollar could rise this week against rivals. "We looked at G-7 meetings starting from 2000...and found that the dollar typically does well in the week that follows," he said.
The euro was at $1.4297 late Friday in New York from $1.4295 Thursday, while the dollar fell to 114.60 yen from from 115.63 yen. The British pound was at $2.0513 from $2.0453.
Treasury Secretary Henry Paulson, speaking after the G-7 conference, reiterated the group's call for currencies to reflect fundamentals, and added: "I believe in a strong dollar."
Write to Dan Molinski at Dan.Molinski@dowjones.com |
