from ft:
The Short View: Greenspan’s optimism fuels dollar
By Philip Coggan, Investment Editor
Published: February 7 2005 14:52 | Last updated: February 7 2005 14:52
The consensus bet, at the start of 2005, that the dollar would fall this year seems to be unravelling. Indeed, as the dollar gains ground against the euro, the pace of the rally may accelerate as the bears of the US currency cut their positions.
The latest positive news from the dollar came from Friday’s speech by Alan Greenspan, the chairman of the US Federal Reserve. Greenspan talked of market pressures and domestic US forces “which appear poised to stabilise and over the longer run possibly to decrease the US current account deficit and its attendant financing requirements.”
The Fed chairman acknowledged the plans of President Bush’s administration to reduce the budget deficit through spending cuts. Whether such cuts can get through Congress is another question. Furthermore, Bush’s plans do not allow for future military spending in Iraq or Afghanistan, or from the revenue shortfall that might result if the administration succeeds in diverting social security contributions into the stock market.
Mark Cliffe, global head of economics and strategy at ING, also points out that the US is hoping for strong economic growth that will push up tax receipts. But this could lead to lower public sector borrowing being replaced by higher private sector borrowing, bringing no relief to the current account deficit.
Whatever the rights and wrongs of Greenspan’s optimism, the key result of his speech was to undermine one of the dollar bears’ best arguments and allowed traders to focus on other factors. First, US short-term rates are now half a percentage point above eurozone rates and more than two percentage points above Japanese yields. This gap is likely to widen. “The Fed will be the only major central bank in the world that will be tightening significantly in 2005” says Stephen Jen, global head of currency research at Morgan Stanley.
Secondly, traders are convinced that the US economy will grow significantly faster than that of the eurozone in 2005, making US assets more attractive. This argument may occasionally be undermined by a weak statistic (such as last Friday’s non-farm payrolls) but it will probably need a long run of poor data before traders change their minds. |
