Slumping Dollar Rallies
The U.S. dollar staged a strong rally against its main rival currencies Wednesday, continuing a rebound that has caused some analysts to reassess what had been a bleak near-term outlook for the buck.
A weaker-than-expected report on the Japanese economy raised anew the possibility that the U.S., although facing huge federal budget and trade deficits, may have better growth prospects than its major rivals. That could lure more foreign investment to America, boosting the dollar.
Underscoring that idea, the dollar’s recovery Wednesday helped stoke buying of U.S. bonds, driving yields on longer-term Treasury issues to their lowest levels in at least three weeks. The 10-year Treasury note yield, a benchmark for home mortgages, slid to 4.12% from 4.22% on Tuesday.
Gold, which had become an attractive alternative to the greenback, tumbled $14.80 to $437.20 an ounce in New York.
Changes in currency values normally get relatively little attention on Wall Street, but the sinking dollar has become a hot topic this fall. Its plunge against the euro, the yen and other currencies has been viewed as a sign that foreign investors are souring on U.S. assets because of concerns about the nation’s mounting debts.
In recent days, however, the dollar has been clawing its way back. On Wednesday, it surged to 104.04 yen in New York from 102.84 on Tuesday after the Japanese government said that nation’s economy grew at a 0.2% real annualized rate in the third quarter. That was well below the median rate of 1.1% predicted in a Bloomberg News survey of analysts.
The euro also slid. It ended at $1.334 in New York, down from $1.343 on Tuesday.
Michael Darda, economist at investment firm MKM Partners in Greenwich, Conn., said the dollar’s revival in part reflected an appreciation of the U.S. economy’s healthier growth outlook for 2005, particularly compared with Japan and Europe. Investors typically favor stronger economies over weaker ones.
Consumer spending in Japan and Europe has been tepid in recent months and appears unlikely to improve soon, said Carl Weinberg, economist at High Frequency Economics in Valhalla, N.Y. Weakness in the Japanese economy, in particular, “is broad-based and everywhere,” he said.
By contrast, the U.S. economy grew at a brisk 3.9% real rate in the third quarter, thanks primarily to robust consumer spending, the Commerce Department said last week.
On the corporate side, the Business Roundtable’s most recent survey of companies indicated that capital spending plans for the first half of 2005 were the highest since the survey began in the fourth quarter of 2002.
The Federal Reserve next week is expected to send its own signal that the U.S. economy is on a solid growth track. Most analysts believe that the central bank will raise its key short-term rate to 2.25% from 2%, the fifth increase this year.
Higher U.S. short-term interest rates may bolster the dollar by offering foreign investors higher returns than what they can get at home, economists say.
Other major central banks are holding their short-term rates steady while U.S. rates are poised to continue rising.
The Bank of Canada on Tuesday signaled that it was in no hurry to raise its rate from the current 2.5%. That helped trigger a sell-off in the Canadian dollar Wednesday. The U.S. dollar’s value rose to $1.218 Canadian from $1.2075 on Tuesday.
Action in the U.S. Treasury bond market Wednesday also suggested that foreign investors were more confident that the dollar’s value would stabilize or rise soon: At an auction of $15 billion in five-year Treasury notes, so-called indirect bidders -- a category of investors that includes foreign central banks -- bought 65% of the notes, far above the percentage they usually buy at such auctions.
The notes were sold at an annualized yield of 3.55%.
The weaker dollar has devalued foreigners’ massive holdings of U.S. bonds over the last two years. Fed Chairman Alan Greenspan helped drive the dollar lower in late November after he warned in a speech that foreigners would eventually become less willing to finance the nation’s budget and trade deficits if they feared that their investments would erode in value.
But that sentiment wasn’t evident in the U.S. bond market Wednesday, traders said.
Even so, many experts wonder whether the dollar can sustain more than a temporary rebound.
Some analysts said the currency’s comeback was simply a function of market excess: Too many people had become convinced that the only path for the dollar was down. And in financial markets, whenever too many people believe anything, the opposite usually happens.
“Every Wall Street chimp that has never before even considered such things now states with absolute certainty that the dollar will fall,” said Chip Hanlon, domestic strategist for Euro Pacific Capital in Huntington Beach.
“Once everyone is bearish, it means that the selling of that asset has already occurred, that there are no people left on the sidelines to push that holding lower,” he said.
John McCarthy, chief currency trader at ING Capital Markets in New York, said some traders who had correctly bet on the dollar’s slide this year -- for example, by loading up on yen or euros -- were cashing out rather than risk giving up their gains.
“As we approach the end of the year, some people with significant positions are taking profits,” McCarthy said.
But he believes the dollar will fall further in the longer term.
“The factors undermining the dollar aren’t going away,” he said. The main threat to the dollar is the nation’s ravenous appetite for borrowing, he and other analysts say.
In the short run, however, that borrowing is helping to fund consumption, which gives the U.S. its healthier growth outlook -- which, in turn, may put at least a temporary floor under the dollar.
