Dollar drop overshadows markets - Calandra
Leading strategists expect further falls for currency
By Thom Calandra, CBS.MarketWatch.com
Last Update: 10:31 AM ET May 12, 2003
SAN FRANCISCO (CBS.MW) - The dollar is crashing. The dollar is crashing.
The American dollar is now at its lowest point since January 1999 - falling as low as
$1.1626 on the euro. The Australian and New Zealand dollars on Monday reached
nearly four-year highs against the dollar.
Gold, which benefits from dollar weakness, rose above $350 an ounce for the first time
since March 12. See: Euro riding high.
U.S. Treasury Secretary John Snow "has been all over the heartland and now all over
talk-TV, saying 'strong dollar, best interests' out of one side of his mouth and 'the market
sets rates competitively' out of the other.' This time he is able to add that exports are
getting
stronger because the dollar is weak," notes longtime currency strategist Barbara
Rockefeller at Rockefeller Treasury Services.
"This is where the administration wanted to be all along and now they can admit it,
especially given the Fed's seal of approval last week to devaluation-inspired inflation,"
says Rockefeller, whose work on currencies is among the best of U.S. strategists. "Now
the only issue is how long it takes for the new perspective to reach the majority of
interested parties."
Rockefeller says Wall Street issuers of stock and bonds have the most to lose as the
dollar slides (more than 20 percent this year alone against the euro). "The stock boys
love to scare themselves with panic stories and the crashing dollar offers a good
opportunity. Corporate bond issuers can't be too thrilled, either. They have to offer a
premium," she says from her Connecticut headquarters. "But before the U.S. says or
does anything to rebalance the outlook, we will probably see both Japanese and
European intervention."
The dollar's continued slide this year will embolden some currency speculators, says
Chuck Butler, chief strategist at Everbank.com. "Liberties are going to be taken with the
dollar now, whenever traders feel feisty enough to do so," Butler said about the currency
markets. "They don't have the fear of a strong dollar policy as they once did."
Butler, whose Everbank.com in St. Louis allows individuals to shuttle dollars into
foreign-denominated certificates of deposit, has been forecasting the dollar's decline for
at least the past two years. His thesis is that investors are seeking the higher yields
available on cash deposits in currencies other than the dollar. Market yields on U.S.
Treasury bonds Monday morning were falling to historic lows, with the 10-year yield
below 3.6 percent.
The dollar still has a way to go -- down, says Butler. "I'm still concerned about the
speed euro traders are marking up the currency, but until I see any signs of a pullback,"
he says, "so you just go with the flow."
For now, stock market investors are paying little attention to the dollar's continuing
cascade. Most must believe, as the Treasury secretary indicated, that cheaper dollars
will help American exporters of goods and services, such as McDonald's (MCD) and
Gillette (G), in their overseas businesses.
The stock market, says Richard Dickson at pioneering analytics firm Lowry's Reports,
"has developed a pattern of ignoring signs of short-term weakness, so at this point we
would give the benefit of the doubt to the bulls. "Until selling shows definite signs of
picking up ... the market is unlikely to suffer anything more than an occasional short-term
setback."
One wild card is oil. Higher oil prices could derail any economic recovery that is in the
cards for this year. Supply constraints could boost oil prices just as the summer driving
season heads our way.
"What's the bottom line? For the oil markets, it means oil in the $25 to $30 per barrel
range for the near term," says Joseph Duarte, Dallas fund manager and financial author.
"But if circumstances worsen in the Middle East, we could see much higher prices for
some time. For investors and traders, it suggests a potential profit opportunity in the
energy sector."
Duarte points to "razor-thin storage margins" of oil in U.S. markets, as well as declining
oil-rig counts across the world as signs supply troubles may be just ahead. "Oil
companies are doing everything that they can to control refinery capacity. And with no
chance for any kind of a swing producer appearing (such as Nigeria or Venezuela), any
kind of further supply disruption, either intentional or accidental with or without an
increase in demand, would send oil prices rising significantly once again," he says.
Duarte, of River Willow Capital Management, uses shares of oil-services firm Lonestar
Technologies (LSS) as his leading indicator for where oil prices are headed. Lonestar
shares are up almost 30 percent since April 1.
"The pieces for another round of supply squeezing are certainly in place, and the oil
stocks are clearly forecasting that the dynamics of the marketplace have been altered
significantly," Duarte says about the flow of oil through Middle East ports. "Lonestar
Technologies is predicting higher prices for oil, just as the oil market fundamentals are
dramatically pointing the same way."
As for gold, Wall Street and Main Street strategists increasingly see the metal eclipsing
its $389 an ounce high from earlier this year as the dollar declines. "The world is
dangerously awash with U.S. dollars. More than three quarters of global central bank
reserves are in U.S. dollars," notes Frank Giustra of Endeavour Capital, a Canadian
merchant banker. "The downward trend in the dollar began two years ago and is very
much intact. Although it has fallen approximately 25 percent against the U.S. dollar
index, the dollar is still overvalued and will most likely fall a further 15 percent in the next
two years alone."
Giustra, former president of mining financier Yorkton Securities, says gold investors will
benefit. "As gold is priced in U.S. dollars, the dollar's decline will make it cheaper to
purchase in other currency terms and less attractive for non-U.S. gold producers to
produce," says Giustra, writing for International Speculator. "More importantly, if its
imperial status is severely challenged and no other currency emerges as a viable
alternative, then gold will regain its historical status as the currency of last resort and the
ultimate store of wealth."
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