Dollar favorite in glue factory derby
The dollar may hang by the slender thread of the U.S. recovery, but this is probably enough to make it the major currency of choice.
It is not so much that the dollar is strong, but that the case for its major peers — the euro, pound and yen — is so weak.
The euro zone faces tremendous pressure; Greece may, just, have been rescued, but it, along with Portugal, Spain, Ireland and Italy are unleashing powerful deflationary forces making quantitative easing by the European Central Bank a real possibility. Further contagion within the euro zone is also a strong possibility, meaning market risk will compound fundamental risk.
Even when the result of Britain’s election is clear, the path to a better fiscal picture is not, and when it comes, it will deal a blow to the economy.
Japan, as for so long, is not really going anywhere and doing so in an erratic fashion, again the implication being that the Bank of Japan will keep rates ultra-low.
The United States, then, is the pick of a bad bunch.
“The dollar is the best-looking horse in the glue derby” said Jan Randolph, director of sovereign risk at IHS Global Insight, speaking at a Euromoney foreign exchange conference on Tuesday.
U.S. manufacturing expanded at its fastest pace in nearly six years in April, though there is some question about how much is actual final demand and how much inventory restocking. Consumers too seem to be doing their thing again; they increased spending for the sixth straight month in April, though they did it courtesy of government transfers and a declining savings rate.
While there are questions about the sustainability of the U.S. recovery, it is also true theFederal Reserve is a lot more likely than any of its big-time peers to start raising rates any time soon, providing further support for the dollar.
In fact, if anything, what is striking is what unanimity there seems to be about currencies among investors and strategists. Everyone, seemingly, sees the dollar getting stronger in the coming year, though many expect there to be considerably more volatility than in the past 12 months. This unanimity could mean that an unexpected event might see a strong reversal.
And really, if you stop to consider the major alternatives, it is easy to see why the dollar is so popular. Thus far this year it has gained more than 10 percent against the euro, 6 percent against the pound and 5 percent versus the yen.