Monday October 11, 2004 - 21:50:59 GMT
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Forex: Weak Dollar Trade Back On Table
Weak Dollar Trade Back On Table
While Friday's disappointing US non-farm payroll data for September may not have ended the debate over whether the soft patch is behind the US economy,
it did put the weak dollar trade back on the table. A break of the upper end of the euro/dollar range at 1.2460 seems more feasible now than it did earlier this month, the last time the pair was nearing the July high.
But the news from the US Friday on employment growth was arguably not the kind of catalyst the market needs to resume the dollar downtrend. Between the effects of the hurricanes that hit Florida and the Gulf of Mexico (which by the way BLS said was not significant) and the benchmark revision to Aril2003-March2004 payrolls, the employment report was inconclusive. What is conclusive is that a growth rate of 3-4% (2H GDP estimate widely held by private sector and government economists) is not sufficiently strong to produce job gains in excess of the 150,000 per month pace at which the labor force grows. Surely slack in the labor market will rise short of a faster growth rate or a slower productivity growth rate. Hence it is difficult to expect consumer spending to remain elevated and begs the question over why firms would add to capacity when the outlook for the consumer is in question. Moreover, a prolonged soft patch would make it difficult for the Fed to take the Funds rate to neutral (somewhere between 3-5%) in 2005. Still with rates low and real estate prices rising, household spending has some legs left yet.
Looking at the other side of the ratio, the euro (Euro Zone) is not an unabridged success story fundamentally. Indeed it isn't even the mouse that roared. While ECB President Trichet maintained his commitment to stay vigilant on inflation after last Thursday's governing council meeting, he also sounded somewhat doubtful about the operating assumption that the recovery is on a sustainable path. Can the ECB be close to a rate hike when the likes of Trichet sounds so tentative? And after the lackluster gain in US jobs in September has to be adding to doubts over the strength of global demand. Trichet was quoted Monday stating the current conditions demand prudence in addition to remaining vigilant on inflation. The case for an ECB rate hike, a range busting event, this year was weakened by the US employment data Friday. The ECB's desire for normalizing rates is as great as it is for any G7 central bank with record lows in official rates. But oil is changing everything. Indeed if Greenspan and the Fed were right about oil as the catalyst for the slow patch in the US economy this spring when crude was $40 a barrel. What kind of patch does $53 a barrel generate? Not even the most inflation minded members of the Governing Council will feel good about lifting rates in November or December with oil prices pressuring the US and global economy. It would appear the window for an ECB rate hike this year is quickly closing.
Sure the big structural imbalances could surface and set the dollar into a steep downward spiral. But no one is capable of forecasting a current account funding problem and certainly no one is capable of getting the timing right on a current account problem/crisis.
The price action and market dynamics remain the strongest reasoning for a break above 1.2460. But without significant supportive fundamentals, dollar bears may have to be satisfied with a minor new high above 1.25 as opposed to a sustained move higher for the euro.
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