The Dollar Is Currently Bottoming

It would appear that the U.S. dollar has abandoned its freefall and is now in the process of consolidating before moving higher.  Two recent articles, one by the Wall Street Journal’s online addition and the other by Business Week provide support for this argument and help explain why the dollar has reached a bottom.

It has been nearly a month since the world’s central bankers and finance ministers got together at the G-7 meeting to discuss the freefall of the dollar that has occurred over the last year.  The ministers, fearing that their currencies strength would limit their country’s exports and slow their economies coupled with their fear that a collapsing dollar would wreck havoc on the world’s financial markets compelled them to begin efforts to support the dollar.

The dollar's recent stabilization is a telling sign that they have been successful.  Through talking down their own currencies, signaling to the markets the detrimental nature of a free falling dollar and in some cases the outright buying of dollars, the members of the G-7 along with the developing world have succeeded in provided support for the dollar.  Since the meeting, the dollar has appreciated by a little more the 2.5%, reversing a multi year slide.  The dollar’s poor performance and the most recent period of stabilization and recovery can be seen in the charts below:

3-year chart of the U.S dollar

1-year chart of the U.S. dollar

In addition to the efforts of the world’s finance ministers, the dollar has also been supported by the view that the Federal Reserve will likely not cut rates further.  The U.S. Economy while have weakened considerably, still has not officially entered a recession.  The article by Business Week points this out, highlighting the May 2^nd unemployment data as an example.  If the U.S. economy can remain flat, avoiding negative growth (aka a recession) the dollar will likely continue its current consolidation. 

It is likely that the Federal Reserve will have no choice but to raise interest rates at some point in the future, probably sometime in late 2008 or early 2009, to offset surging commodity prices and the corresponding inflation, this will provid further support for the dollar in the year ahead.

Whether or not the G-7 meeting or the likely end of interest rate cuts and a surprisingly resilient U.S. economy were the cause of the stabilization in the U.S. dollar is irrelevant.  The point is we have reached a bottom and as investors we must be prepared to begin to act accordingly over the next six months to a year.

For Further Review:

WSJ.com Article

Business Week Article 

Comments

[EUARTE]

This is welcome news.
Alas, where I live, in Brasil, it seems not to count. The exchange rate for dollars seems to ignore everything and continues to fall. The reality is that there has been one dollar positive article after another, for ever it seems, but the dollar keeps falling. The truth is as long as the Federal Reserve and Congress continue their love affair with the printing press the dollar will continue to fall. It may stop briefly but certainly not in Brasil.
It seems so short sighted to only look at the Yen and the €.

[mark van]

the dollar is toast

[dlaw]

Well, I dunno. I'm looking at the EUR/USD chart and seeing maybe the most classic "triple bottom" I've ever seen, albeit on a very short-term basis. And GBP/USD seems to be coming off its lows sharply today.

There has been some good forex news in dollar-land to be sure and we in the US are finding we're not alone in having a slowing economy. But neither are we alone in having inflationary pressures from commodities. And we are distinguishing ourselves in money creation, so......

Well, we'll see I guess.

[TinyTim]

it was a real money maker shorting the dollar on the FOREX while it lasted. Looks like I better quit while I'm ahead.

[blah-blah]

It's definitely done and while you may get some choppiness for a while, the smart money has left as the easy money is over.

[pharma]

The Dollar Is Currently Bottoming. Is this some kind of a joke?

Do they have problems printing $$$?

OK, OK, we do not have any inflation and/or humongous domestic and foreign/trade deficits!

Either the author is a clown or he thinks that all his readers are imbeciles.

[syruppy]

I'll take all the UUP you got at $22.30 or less and ... thanks for all the fish!

[LouThomas]

There's only one part of this article that I find credible, and that is that the ECB and Fed are undertaking some limited support operations for the dollar. Probably via the swap lines, which were expanded by an (unspecified?) amount just around the time the dollar started on its present "recovery."

Recall that when this turnaround occurred, the Euro was headed past $1.60 and off to who knows where. It looked like an uncontrolled crash of the world's main reserve currency may have been in progress. Nobody wants such an uncontrolled collapse at this time, even the ECB, which I think does want the dollar to decline, but gradually, so that the Euro can be the new world reserve currency - once it is fully ready to play that role.

Anyone who thinks that the Eurozone is prepared to carry the entire bloated U.S. economy on its back is out of their mind. This is, in my opinion, nothing more than a short-term rap on the knuckles for all of the short-term speculators who were driving the dollar over a cliff. Trichet reached out his "invisible hands" and pulled all of their shorts down, and they ran quickly to cover themselves, driving the dollar up in the process. This is probably what the plunge protection team at the Fed has been doing for U.S. domestic stocks for who knows how long now.

Short-term, it is painful for the speculators (but they're creating a serious problem for world stability, so it's a good kind of pain). But if you are dug in for the long term in German bunds or other longer-term Euro-denominated instruments, and can afford to wait a month or two, I predict that the dollar will continue its bumpy ride down the stairs, with periodic shocks to short-term speculators from the ECB/Fed's new cattle prod.