The dollar, the “whipping boy” of the foreign-exchange markets, is fighting back, prompting speculation that its seven-year downtrend may be over, says Peter Garnham in the FT. Having hit a record low of $1.60 to the euro in late April, it has rebounded to below $1.55. On a trade-weighted basis – against a basket of trading partners’ currencies – it has gained around 3%. Meanwhile, the euro has lost around 2% in trade-weighted terms.
The Fed’s ambiguous statement following its latest interest-rate cut hinted that its easing cycle may be nearing an end, a view reinforced by the fact that recent US data – such as the unexpectedly small drop in payrolls – has been less dire than anticipated. In the eurozone, conversely, the picture has remained gloomy. The European Commission’s economic sentiment index slid to its lowest level since August 2005 in April, with business confidence dented across the board.
Consumer confidence in France is at a 20-year low and German retail sales unexpectedly slid for a second month in March as consumers, rattled by inflation, kept their wallets shut. With both domestic demand and exports weakening, expectations that the European Central Bank (ECB) will have to start cutting rates have mounted. The issue isn’t if, but “how fast” the euro will correct from its recent apex, says Michael Ramon Klawitter of Dresdner Kleinwort.
Not so fast, says Capital Economics. Interest-rate differentials look likely to favour the euro for a while longer; given the pressure on the American consumer as housing continues to slide, and the drop in business investment, the economy is likely to contract sharply and the Fed will have to respond with further rate cuts.
And while eurozone rates should fall, hawkish ECB rhetoric suggests this will have to wait until the third quarter. The upshot is that the euro is likely to hover around current levels and possibly rise again before sliding back to around $1.50 by the end of this year. It is “not about to collapse”.
The crucial drivers behind the dollar’s trade-weighted downtrend of the past few years haven’t gone away, says Edward Hadas on Breakingviews. Loose monetary policy is still an issue. With real rates at –2%, dollar assets are losing real value and offer a negative real yield. And the trade deficit is still huge at 5.1% of GDP. Don’t “get too excited” about the latest uptick in the greenback.