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Thursday September 30, 2004 - 18:23:12 GMT
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Forex: Is Weak Dollar Trade Back?

Is Weak Dollar Trade Back?

While I am no chartist, the strongest argument for the weak dollar trade resuming for the next several quarters so far is technical (for many, not all chartists). It is lower because it is lower. It is hard to find hard fundamental reasons to explain the timing for what appears to be a serious break out of the range (euro/dollar for sake of argument) since the early spring. The US economy has all the vital signs pointing to growth, albeit pace is still in question. Surely Chicago PMI in September today argued in favor of a faster pace of growth...the Greenspan view...and a stronger dollar. But PMI and ISM are hardly conclusive data points on the strength or pace of the recovery. And surely with the all important September payroll data a little over a week away, think most fundamentally-oriented traders would prefer to withhold judgment on the economy and hence willingness to sell dollars (hold short dollar positions) on a sustained basis is not there...not yet.

But price action has a way of flushing out fundamentals. A couple of more days like this and the fundamental rationale for a sustained decline in the dollar will be crystal clear. I could write one now but it would be more fiction than non-fiction. Then again why should we assume that randomness can't lead the dollar through the long-term range...just as it contained it in a range since the spring.

Stocks are lower, gold is higher, US Treasury yields are rising, Japan and the Euro Zone economies are tepid and the US economy may or may not be through the slow patch (as said earlier we will know more in a week). In other words there is not much to hang a fundamental hat on.

What about G7? Forget the "The UK Business" article from Sunday that claimed some senior US officials are seeking a consensus (first within the administration) to devalue the dollar at G7 by 20%. Apart from the fact that devaluation implies a fixed exchange rate regime the source/s for the story must have been winding up the journalist. Rest assured no such discussion is happening within the Bush administration at levels that matter. And safely assume the language from the Boca Raton G7 statement will be repeated (flexible exchange rates welcome and excessive volatility unwelcome).

Can we get excited about Euro Zone fundamentals? Next question.

Is this the start of the great US structural imbalance trade where foreign investors bail on US assets and the dollar? Look dollar, bonds and stocks are all down. Sorry but one data point does not make an adequate case for a sea change in portfolio preferences...against US assets. Yes watch for this, but many data points are needed.

So think the better part of valor, even for a diehard dollar bear like me, is to start thinking about selling euro/dollar ahead of 1.25. What do you do long euro/dlr at 1.25 in a week's time when say September payrolls comes in at 200,000 (it could)? So I am doubtful that the equilibrium I have subscribed to in prior columns is over. I do think it will end, but it did not today.

David Gilmore
FXA
www.fxa.com

 

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