isopatch,
Date: Sun Aug 19 2001 16:05
yogibearbull (Task at TSCM on $, gold, bonds) ID#182196:
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"Giving a Damn"
Widespread concern about the dollar didn't emerge until Wednesday, when the currency hit a five-month low vs. the euro and a two-month low vs. the yen. The dollar stabilized Thursday and Friday, but finished the week down 2.5% vs. the euro ( its sixth consecutive weekly decline ) and 1.4% vs. the yen. The dollar index, which measures the greenback's strength vs. a basket of other major currencies, fell 1.9% for the week.
Despite heightened awareness about the dollar, few on Wall Street seem terribly concerned about developments in the currency market -- and for good reason.
First, the Bush Administration has repeatedly pledged support for the so-called strong-dollar policy. Some question what exactly that means and others question the administration's dedication to the policy. But the bottom line is Treasury Secretary O'Neill and others saying the strong-dollar policy is intact is better than the alternative.
Second, and more fundamentally, many participants argue that the dollar won't fall dramatically because the U.S. remains the most attractive to global investors and because other major economies can't afford to have their currencies rise too dramatically.
In Asia, the collapse of global information technology markets will keep countries such as Taiwan and South Korea "on the mat" and push savings into dollar assets, Stephen L. Jen, co-head of Morgan Stanley's currency research team, commented midweek. Meanwhile, Japan is likely to intervene to weaken the yen because yen strength vs. the dollar worsens prospects for economic recovery there. Indeed, comments from Japanese financial officials indicating such views helped stem the yen's rise this week.
In Europe, "manufacturers are likely to be as vocal as their U.S. counterparts in resisting a stronger domestic currency versus their major competitors' currencies," Jen continued. "For these reasons, I don't believe a hard crash in the dollar will be tolerated."
Ashraf Laidi, chief currency analyst at MG Financial Group, a provider of currency trading services, takes a similar view.
"Further dollar decline risks triggering a negative supply shock for Europe, Asia and Latin America, all of which are barely growing and operating below capacity," Laidi wrote in an email exchange. "And since the U.S. buys up nearly a fifth of world's exports, a retreat in the U.S. currency would erode the U.S.'s role of importer of last resort," indicating why the declining imports in Friday's trade report was so troubling.
Nevertheless, Laidi is skeptical that an "orderly decline" of the dollar can be engineered as some observers, notably Bill Dudley of Goldman Sachs, recommend.
He predicted the euro will hover between 93.25 cents and 89 cents until the European Central Bank's meeting on Aug. 30 "clears the picture better." The euro closed at 91.76 cents on Friday.
The Federal Reserve's meeting next week is also likely to affect currencies. In contrast to previous rate cuts, Fed easing next week may result in a weaker dollar if traders fear it will entice inflation rather than economic growth.
Inflation fears have receded in recent weeks and the consumer price index for July, reported on Thursday, posted its biggest drop since April 1986.
But both the CPI and the core index are up 2.7% for the past 12 months. The Cleveland Fed's median CPI, considered by many to be a better inflation indicator, is up 3.7% in the past 12 months after rising 0.3% in July.
#####Meanwhile, gold and gold stocks performed well again this week, notably Friday.
A "flight to safety" is the most rational explanation for an environment where inflation hedges such as gold are rallying at the same time as Treasury bonds, to which inflation is anathema. Such a flight makes sense, given what's happening in Argentina, Brazil and the Middle East, as well as on Wall Street.
But Treasury bonds are unlikely to continue rallying if the dollar keeps falling. It would appear that "something" has got to give in the coming weeks.
Equity trading volume was punk, but don't let anyone tell you the financial markets were "boring" this week. "
thestreet.com |
