5 Reasons Why the U.S. Dollar Will Weaken Further 42 comments
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The US dollar has fallen to a record low against the Euro and an 8 year low against the Japanese Yen this past week. Here are 5 reasons why I think the weakness will continue:
1. Non-Farm Payrolls Will Continue to Fall
For 2 months in a row, jobs decreased in the US economy. I expect
these numbers to worsen over the next few months because the current
state of the labor market is nothing compared to the 15 consecutive months of negative job losses between 2001 and 2002.
2. The Federal Reserve is on High Alert
Not only are Fed Fund futures pricing in a 98 percent chance of a 75bp rate cut on March 18th, but the Federal Reserve is on high alert. For lack of a better description, they are “freaking out.” Friday morning, they announced moves to pump 200 billion dollars into the banking system to ”address liquidity pressures in the funding markets.” Although they denied that this was related to the weak jobs report, the timing is certainly suspect. The announcement may have been aimed at preventing a non-farm payrolls induced collapse in the stock market, which worked for about an hour before stocks completely reversed all of its gains.
Two year bond yields are also currently yielding slightly more than 1.50 percent while the Fed Funds rate is at 3 percent. That difference of 150bp means that in order for the gap to be neutral, the Fed would need to immediately cut interest rates by 150bp. Since 1990, the average spread between the 2 year treasury rates and Fed funds is approximately +50bp and over the past 10 years, it is +25bp. Therefore it is not rocket science to see that a gap of -150bp is a huge discrepancy and tells us that the Fed could bring rates down to as low as 1.50 percent. Lower interest rates equal a lower US dollar.
3. Retail Sales Could be Negative Next Week
Retail sales could also be negative next week which would lead to another round of dollar selling. 34k jobs were cut from the retail sector and according to the following WSJ chart, sales at most retailers other than discounters have been weak. With gas prices skyrocketing, foreclosures hitting a record high, the labor market weakening and confidence at a record low, discretionary spending may be the last things on the consumer’s mind.
4. Speculators Still Trying to Pick a Top in the EUR/USD
The latest FXCM Speculative Sentiment Index,
which is a contrarian indicator, also calls for further gains in the
Euro against the US dollar as speculative short positioning continues
to grow. Retail traders are often times caught on the wrong side of the
market as they struggle to pick top and bottoms. As indicated by this chart of positioning in the Euro, retail speculators turned net short the EURUSD at 1.25 and have remained short since then.
5. Technicals
According to the technical Elliott Wave formation of the EUR/USD, a spike above 1.56 is very possible before dollar bulls see any relief.
My near term targets is for USD/JPY to fall to 100 and the EUR/USD to rise to 1.55.
However with that in mind, I still think that the US dollar will recover in the second half of the year.
I am a strong believer that we will see a V or at least a U shaped recovery in the US economy that will trigger a dollar recovery and rally in the second half of the year. The Fed’s doing a lot right now and they are being extremely aggressive and this would be especially true if they cut interest rates by another 50 to 75bp this month. Imagine the relief for US consumers and businesses if interest rates came back down towards 1.00 percent. Everyone will be rushing to lock in those rates and use that money for refinancing or capital expenditures. The degree of monetary and fiscal stimulus in the pipeline should lead to a shallow downturn and a swift recovery.
Unlike the past, there is still a lot of money to be spent in the Middle East and Asia. When the US recovers, investors in these countries may sweep in with newfound optimism, which will give the dollar a chance to recover as well.
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This article has 42 comments:
THE U.S. CURRENT ACCOUNT DEFICIT!
1. The dollar will not see additional pressure due to the lower interest rates. I do not buy the argument that they have been factored in.
2. The price of oil will overwhelm offset the stimulus check from the FED.
3. The financial markets will be able to recover even with the negative equity in most banks.
5. Inflation will not accelerate due to oil and the FED pumping money into the markets with fire hoses.
6. Increased inflation will not cause the cost of long term borrowing to rise.
7. The lower short term interest rates will not drive foreign investors to reserves other than the dollar.
8. The American consumer who is tapped out and under water with mortgages will continue to spend and support 70% of the economy.
9. The greed of the now huge hedge funds will not drive the market into the ground as result of elimination of uptick and other rules for quick profit emulating the 1987 crash.
Given those assumptions the derivatives market is about 14 times the world’s economy and melting fast. This alone could swamp anything the FED could do.
On top of that, a number of banks have taken hits from th sub-prime collapse, and may keep rates inflated in order to recover some of the losses.
As another poster pointed out, what we are seeing now is the result of a tremendous consumer glut and lax lending standards. Now all those bills are coming due. Everyone has there hand out and not enough people have the cash.
Rate cuts in this case will do little to spur the economy. Flooding the market with billions in fed auctions also seem to have done little to alleviate the credit block. In th end, all this is really doing is inflating the dollar, which also ends up making it more difficult for our consumer-centric market to recover.
The dollar will continue to fall, and any external action by the fed will (at best) have little to know impact to halt the slide. In my opinion, this is going to take a lot longer than 6 months to get a recovery going. We're getting precipitously close to where Japan was, and there are more than and handful of indications that we're staggering towards the spectre of stagflation.
But that's just me. :)
~X~
Useless.
drop is well underway and the flight to safety(reserve currency) will follow the last half of the year.
Commodities are holding up the indexes giving a false picture. There seems to be no place to run or hide. Be defensive - sell rallies.
Does anyone recall spp.gov? Talk of the Amero? Mexico, US, Canada united much like the EU, having one currency?
At the risk of being dismissed, I offer that perhaps easy credit was deliberate to place us in this spiral, so that the dollar may be crashed out. And a new fiat money brought to us, as a savior from on high.
We'll have to wait and see.
Of course everything done by the Fed to print more more (i.e. rate cuts) results in greater inflation and hence a weaker dollar, all other things being equal. So, I don't necessarily see as much upward pressure on the dollar in second half. However Lien makes excellent points here that the Fed is stepping in here so agressively to avoid a US recession. Good points Lien, as this is not generally being reflected by the mainstream press.
Bush's deficits contribute to the dollar's decline through simple supply and demand economics. How many more treasury bonds will China eat, how many can China eat?
Moreover, the weak dollar is in a vicious cycle. A foreigner in a foreign country (as apposed to the 20+ foreigners who illegally live in the USA would be a chump to buy US stocks and bonds with his own currency. (Buying physical assets as the foreign sovereign government investment funds do makes real sense, on the other hand).
McCain is proposing more wars and more tax cuts and thus even higher government deficits. If he wins, the dollar will go to 5 Euros and oil to $400 a barrel..
Stop Irak war as 1st step.
2nd stop saying every week that Oil reserves are low or high.
3rd Policy for using more public transport and less personal car use.
4th Make arrangement with people with mortgages problems.
5th reduce trade deficit
Kathy - a little word to the wise in terms of the form of your article. People here all recognize that the US$ will have a bottom. They are looking for tradeable/investing opportunities. If you are saying 'stay short the US$', then keep that as the central theme and don't muddy the intent with speculation that we will see a bottom at some point (which we already know). When we get there, please post that article. I think you got a bunch of negative comments which you didn't really deserve, absent the last three paragraphs of your article. Hopefully you will simply take this as a constructive comment.
regards
1) Outside USA, most major eco doing well and not necessary counting on USA consumers as solely export sources. Everyone easily to lean how to spend money when they have.
2) There is more 4 trillion USD held by foreighers. Once USD down the hell, they are dump or they will dump every uptrend. Why not.
3) Nobody will give real assets/resources to USA in exchange of paper. US/Fed prints paper money at 15% rate every year and no reasons stop.
4) USA lost manufacturing with no return. By 2038-2050, USA will have 50% population of black and Hispanics. That can not complete against Japan, German and China. Or you are live in the dream world.
But markets don't work like that. If everyone takes the same side of a trade well the market flips and suddenly for no reason and no explanation the dollar will start going up. You can bet on it. The world is not going to end.
With that said, I think Kathy has done a good job. I like two arguments. One is that things will not really turn in the US until housing at least stops going down. Does not need to go up...just needs to stop de-inflating. (see Mr G above)
Next, I do like the argument that if everyone is on one side of the trade it may be time to go to the other side. (Vasbyt above)
But, it is also true that markets are a river and I am not sure I want to row in the direction of a stronger dollar just yet. I think the river points down for a bit yet. Better to go with the flow in the short run here.
The dollar could turn around very fast if the fed wanted it to, but they are busy fighting their trade war with China and trying to bolster US manufacturing exports
"4) USA lost manufacturing with no return. By 2038-2050, USA will have 50% population of black and Hispanics. That can not complete against Japan, German and China. Or you are live in the dream world."
What is that suppose to mean?
Perhaps you mean that Spain and Nigeria are going to default?
You wouldn't be posting petty racist comments on SA, would you?
Are you trying to say that the Germany, Japan and China have a better education system and therefore the U.S. can not compete? If so, then say it without picking on race. If there are cultural differences in the U.S. that need to be addressed, then this is a challenge not an inhibition.
Apparently 'black' and 'Hispanic' people do quite well (as in equal) in Germany. One wonders if all dragons are treated equally in China by their masters.
Disclosure: Personal comment by a CrossProfit analyst and may not reflect the opinion of crossprofit.com. Comment is not related to website.
The attempt to bolster our economy by lower Fed rates is a losing proposition, in the end. The vast sums of investment by foreign investment sources is doomed to dry up, and be withrawn, as higher inflation (possibly hyper-inflation) and lower yields drive those investors into other markets/currencies that continue to value a strong currency in the long run, versus short term stimulus programs that artificially prop up markets.
Will be interesting to see if the summer run-up is followed by a precipitous selloff by the institutional investors.
Subprime is affecting many other foreign economies. But, their ability to offset the debilitating effects is greater than ours due to the overall lower impact, and truly organic growth. As the emerging market's standard of living improves, the developed world's will decline. Economic collapse is low probability, but a continual degrading of the US economy is high probability. Look forward to protracted dead cat bounces for the next few years., and a very hard slide (6000-8000 Dow) eventually.
As for inflation, it only works if the economy picks up. Japan has been printing money like mad and the yen is going up! The reason is the V in MV=PQ. Even with a small amount of money, if no one wants to hold it, prices will soar. On the other hand, if people want to hold cash, a rise in M will be offset by a fall in V. If you think the economy will tank, you should consider what happens if velocity falls and causes deflation.
A) No more East/West conflict. A lot of erstern european countries have little dollar reserves. For them the Euro is the lead currency.
In fact the Euro is strong because of those fast growing markets in the East. They provide two things for Europe: Cheap production facilities and hungry consumers.
B) 20 years ago the Chinese were growing rice and the Indians cooking their curries. Today they engineer software and produce incredibly good products at unbelievable cheap prices.
As the wealth in those countries has significantly grown, they should be seen as substantial markets of their own, that will get less and less reliant on the US.
C)The Euro has changed the economy in Europe and the European central bank has very little to fear, while Bernanke gets grilled by the US media and politicians. That's not helping to stabilize the US system.
D) Oil and gas producers like Russia and Saudi Arabia have now the option to switch to the Euro as the currency of choice. That's a change to the 80s as well. It removes the need for them to keep dollar reserves and they will like shift some of their reserves to the Euro, which will put more pressure on the dollar.
E) What if the world starts to move away from the dollar for trading because of its instability? The Euro zone is less likely to be involved in silly wars and the "stability pact" prevents any member state from having a deficit of more than 3% of the GDP. In fact the Iraq war and the related US foreign policy has brought France, Germany and the other core EU states closer together than any European summit could ever have done.
F) Lets face it: The Bush government, the Iraq war and the completely irresponsible mortgage practises in the US have led to a level of distrust and frustration in the rest of the world that will be hard to restore. If the world does not trust the US politics and economic practises, why should it trust the currency.
It will be interesting to see how this all develops, but for sure the Bush administration has left the country in the worst state it has been for at least 50 years. For the 2-3 Triliion dollars the wars in Iraq and Afghanistan will have cost by 2011, you could have bailed out *all" home owners in one go. (That's giving 20-30M Americans a 100.000$ cheque). Let's not even talk about what that money could have done for the education system, or how it could have changed the haelthcare system.
We need a change!