Dancing with the dollar
The recent rise in the dollar's fortunes, if it sticks, would bring some welcome stabilization. Is there a true reversal of fortune in the works for the U.S. dollar, or is this week's move higher a temporary rebound?
Encouraged by Germany's Chancellor Gerhard Schroeder, traders have sold dollars and bought euros aggressively the last couple of days. The euro shot lower, dropping from over $1.29 back down briefly below $1.23 in what seemed like the blink of an eye as Schroeder urged the European Central Bank to cut rates in order to bring the euro down and give some relief to Europe's exporters.
[Isn't this ass backwards? - Mish]
As he meets today with President Bush, the "strong" euro problem is expected to be on the table.
This is no small deal for European companies, many of whom have been reporting that the euro's rise has sliced big chunks off their recent earnings reports. Many overseas auto company stocks rallied today, in fact, on hopes that the dollar rebound will provide more than temporary respite.
Today, possibly bolstering the case for a possible ECB rate cut according to economists, comes news that European inflation is decelerating, to an annual rate of 1.6 percent in February below the target rate of 2.0 percent. Traders are still not betting on it, given that many ECB officials continue to suggest it's not necessary.
Japan looks somewhat different as data continue to point to a stronger economy. But who cares?
In February, the bank of Japan spent another $30 billion to make sure the yen doesn't rise too far and choke off Japan's exports.
What does it mean for you?
On a most fundamental level, the sliding dollar has been watched as a possible threat to U.S. bonds and stocks. If it falls too far too fast it could spur foreign money to fly out of U.S. investments, the worriers say.
If it looks like the currency market is stabilizing, it eliminates that potential threat to investors.
It may crimp the profits currency traders make in volatile markets, but they're big boys and girls who are paid to take that kind of risk. The bigger picture is the stability of the U.S. and global financial system and anything that contributes to that is a good thing.
[Is this what passes for analysis these days? - Mish]
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