Dollar Looks OK for Now

by: David Andrew Taylor

The Dismal Scientist is probably one of my favorite reads. It does have a fairly hefty price tag involved, but their analysis is pretty decent. Moody's bought them about a year ago, and since they've discovered a small piece of celebrity. The analysis tends to be pretty good on the economy. But, sometimes their pieces on the dollar leave me scratching my head.

I found an article in the Dismal Scientist ($$$) this morning outlining the structural challenges that the dollar faces going forward. They've outlined their reasoning here:

With cyclical drivers for the dollar now fading to the background, the market has renewed its attention on structural drivers, which do not look good. The U.S. current account and budget deficits are often cited as long-term drags on the dollar. While the U.S. continues to combat its twin deficits, other major economies are now on tightening paths, making interest rates more attractive in the U.K., Australia and the euro zone. Finally, the long-term trend of greater central bank diversification in FX reserves is one that will continue to favor the euro against the dollar. For these reasons, we believe a structural bear market for the dollar is drawing near.

From the article I basically got that interest rates are heading higher elsewhere, and the dollar is in a stare-down contest with the twin deficits.... and the weight of the dollar's eyelids are about as heavy as a 400-pound gorilla.

I'm going to take exception to this article. The Treasury release's have shown net inflows to be more then enough to cover the deficit. In fact, we're seeing a positive flow in that regards. As for interest rates, the article cited the Australian rates and the British rates as going higher. Regardless, the rate differential between Australia, Britain, and the U.S. are tight enough that there really isn't enough to push a trader into either currency, not with interest rates elsewhere around the world sitting at anywhere from .025% to 3%. That's a real differential when you look at Australia sitting at 6%. But, even that's not really helped out the Aussie dollar that much.

I think we're still not out of the woods yet with interest rates here in the U.S. We're likely to see the Fed getting antsy in about 5 months. We'll know a lot more regarding inflation at that point, and whether the lagged effects are having the desired affect. But, I don't think the dollar is in any foreseeable troubles right now.