Another day, another crisis for dollar
By FT Reporters
Published: February 27 2008 21:28 | Last updated: February 27 2008 21:28
It was d-day for the dollar on Wednesday – ‘D’, as in downward, devalued and dumped.
The greenback sank to all-time low against a basket of currencies, and broke for the first time through the psychological $1.50 level against the euro, as Ben Bernanke suggested that he would continue to cut interest rates to prop up the US economy.
EDITOR’S CHOICE
The Short View: Dollar sell-off - Feb-27Robust dollar signals switch of focus - Feb-11Analysis: Dangers of the dwindling dollar - Dec-27Lex: Emerging markets and decoupling - Dec-04Market insight: The greenback hasn’t sunk yet - Dec-03Fed minutes weigh heavily on dollar - Nov-21The emphasis on growth rather than inflation by the chairman of the US Federal Reserve prompted investors to seek refuge in real assets such as gold and crude oil as a hedge against future inflation.
In recent weeks, the dollar has been supported by hopes that a string of rate cuts would jump start the economy. But on Wednesday, that support fell away.
Ashraf Laidi, of CMC Markets in New York, said: “The record lows in the US dollar and the record highs in gold and oil mark a key tipping point in currency markets”
He added that, rather than subscribing to the notion that the Fed’s aggressive rate cuts were a positive for the US economy and hence for the dollar, the greenback was “being damaged across the board on the notion that the ultra low interest rates at the expense of escalating inflation is the only way forward.”
The dollar hit an all-time low of $1.5143 against the euro.
But its weakness was not confined to the European currency as it slumped against the yen, sterling, the Swiss franc and the currencies of a number of commodity producing countries.
Don Kohn, the Fed’s vice-chairman, helped spark the dollar’s slide on Tuesday when he said the weakening US economy was more concerning than rising inflation, which he expected to recede.
Mr Bernanke on Wednesday confirmed the market’s belief that the Fed’s rate-cutting drive would continue, pledging to “act in a timely manner as needed to support growth”.
Mr Bernanke’s testimony came a day after data showed weakening US consumer confidence and further deterioration in the housing market.
The string of poor data from the US on Tuesday was accompanied by a surprise rise in German business sentiment, exacerbating the dollar’s fall against the euro.
The euro was also supported on Wednesday by robust growth in eurozone money supply, suggesting that the European Central Bank was unlikely to join the Fed’s rate-cutting drive anytime soon.
Decoupling – the idea that the global economy, and particularly big consumers of raw materials such as China and India, is no longer dependent upon the health of the US – is coming back into fashion.
Strategists say soaring commodity prices, while in part driven by the lower dollar, are also tied to the conviction that the global economy is proving resilient in the face of the US downturn.
“The market is buying the decoupling thesis that while the US looks like it’s sliding into recession, the rest of the world is trundling along okay. That view has only really emerged this week,” said Adam Cole, senior currency strategist at RBC Capital Markets.
Commodities are not just being boosted by optimism about global growth, but also by concerns about inflation. This helped lift West Texas Intermediate crude oil on Wednesday to an all-time high of $102.08 a barrel, while spot gold in London surged to a record of $964.70 a troy ounce.
Francisco Blanch, of Merrill Lynch in London, said: “Investors are coming into the commodities asset class as a hedge against fears of a spike in global inflation.”
Mr Blanch added that loose US monetary policy could fuel growth in some Asian and the Middle East countries, where the peg of their local currencies with the dollar meant those countries needed to mirror low US interest rates.
The weakness of the US dollar increases the attractiveness of dollar-denominated hard assets, such as crude oil and gold, to non-dollar investors, analysts say.
It could also prompt some commodity-producing countries, such as Opec members, to seek higher prices for their raw materials to compensate for the lower-purchasing power of the dollar.
Mr Bernanke on Wednesday acknowledged that weak dollar was probably affecting oil prices. “We obviously watch the dollar very carefully,” he told the US House of Representatives.
Middle East oil producing countries officials complain that Wall Street investment banks are marketing crude oil investment in the same way they do gold: as a hedge against dollar weakness and inflation risks.
“Oil is the new gold,” one senior official from a producing country said.
Hans Redeker, global head of FX strategy at BNP Paribas, said the cycle in the commodity markets would turn when the Fed eventually began to combat rising inflation.
But few analysts expect the US central bank to raise interest rates any time soon.
The question for traders on Wednesday was whether the dollar, which has already fallen 20 per cent against the euro over the last two years, would continue its decline, or whether it would rebound.
Before this week’s fall, some traders were betting on a recovery this year. Its fall on Wednesday was exacerbated as they scrambled to readjust their bullish positions.
“The market has been caught wrong-sided by the rapid drop in the greenback,” said Jim McCormick, global head of foreign exchange at Lehman Brothers.
This factor could drive further dollar weakness in the short-term, he said, but expected the currency to recover in the second half of the year.
RBC’s Mr Cole agreed: “The dollar bear market is running into its final stages – I don’t think it will get much weaker than $1.52 against the euro.”
Reporting by Javier Blas, Sarah O’Connor and Robert Cookson in London
Copyright The Financial Times Limited 2008 |
