The US Dollar Tea Leaves

By: Randolph Buss | Thu, Nov 18, 2004
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In this Bloomberg article I read a few interesting things which coincide with my view of the ongoing US dollar weakness and the possibility for an upward correction. Part of the article I have listed here below. The interesting thing which I have stated in the 15 Nov version is the upcoming G-20 Finance Ministers & Central Bank Governors conference in Berlin. Why is that interesting? Look at the final statement below made by the Greek Finance Minister. Now part of successful investing, at least to a certain degree, is reading the political tea leaves as they are laid out. What could be a better venue than a G-20 meeting in Berlin the day after tomorrow to coordinate a global policy? I certainly cannot think of any.

Are we at the precipice of a USD correction? The indicators in the Bloomberg article certainly point to no intervention so maybe a contrary point of view is warranted. Equally, when John Snow starts saying all over Europe he wants the US Dollar to "find its own level" in the marketplace, then one can likely take the cynical approach and assume something is in the pipeline. Of course we don't know for sure but I wouldn't take their words for much more than that, just words. Talking the talk - that is their occupation.

'Overshoot' Risk

Goldman, which last week lowered its forecasts for the U.S. currency, said its trading "action this day" is to sell the dollar against the yen. In a report to clients, the bank advised closing the trade should the dollar close above 107.50 yen.

Measured by the Federal Reserve's Trade-Weighted Major Currency Dollar Index, the dollar has shed 22 percent since U.S. President George W. Bush took office in January 2001. Under Bill Clinton's last two Treasury secretaries, Robert Rubin and Lawrence Summers, the index advanced about 24 percent.

Further gains in the euro raise the risk of an "overshoot," said European Central Bank council member John Hurley in an interview in Dublin. There is "nothing ruled in or ruled out" regarding currency sales by the ECB to stem the euro's advance, Hurley said.

The U.S. currency's decline may stall, based on a technical indicator some traders use to gauge trends. The dollar's 14-day relative strength index against the euro is at 71.5. Against the yen, it's at 29.2. The index shows how rapidly prices have risen or fallen in a given period. A level above 70 or below 30 suggests a currency may change direction.

Who's Left?

Hedge funds and other large speculators placed record bets on the euro to gain against the dollar in the week to Nov. 9, according to U.S. Commodity Futures Trading Commission figures released two days ago.

"When you look at the positioning, you have to wonder who's left to buy the euro," said Robert Rennie, currency strategist in Sydney at Westpac Banking Corp. "The market is significantly short the dollar. That leaves open the possibility of a short-term correction."

The Dollar Index, which measures the dollar against a basket of six currencies, fell to 83.38, the lowest since 1995, according to data compiled by Bloomberg. The New York Board of Trade's index averages exchange rates between the dollar and six other currencies, with the euro accounting for 58 percent.

Trade Gap

The dollar has slumped in part on concern about the U.S. current-account deficit, said Michael Klawitter, a currency strategist at WestLB AG in Dusseldorf, Germany. The current account, the widest measure of trade as it includes some investment flows, was a record $166.2 billion in the second quarter. A wider gap means more dollars need to be converted to other currencies to pay for imports.

Greek Finance Minister George Alogoskoufis said Europe alone can't halt the dollar's decline, and the U.S. and Japan would also have to buy U.S. currency. "It's a matter of having a coordinated policy at the global level," he said in an interview in Brussels.

This is not meant to be an alarmist comment but rather is simply to remind us that the politicians are saying one thing and the technical indicators of traders are saying something else. We know markets can overpower politicians per se, but in this highly incestuous political game, all are sleeping with one another, but we sadly don't know who with whom and for what reason.

At this point, I'd give the tea leaves a 75% chance for a short term USD correction. We shall likely know more nearer to the G-20 conference.


Randolph Buss

Author: Randolph Buss

Randolph Buss
Berlin, Germany

Randolph Buss, currently works in portfolio & asset management | commodity fund advisory & management | macro investment research as editor and publisher of his newsletter read in over 45 countries.

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