Tel Aviv reported former Federal Reserve Chairman, Alan Greenspan saying that he sees a weaker dollar for the next few years as the United States grapples with a balance of payments deficit.
Moreover, he noted that some countries in particular the oil producing countries with large US dollar reserves have begun to diversify into other currencies including Euro and Yen.
Respectfully speaking, Alan Greenspan has not always been right in his views. In this instance, we tend to disagree with his view.
The U.S. has been battling a balance of payments deficit for the past 4 years and also a domestic deficit for the past 8 years. Yet, it did not stop the US Dollar from powering against the Euro to a peak of $0.83 back in January 2002. Then losing total ground to the Euro when it hit bottom in January 2005 at $1.3580. Again, the US Dollar powered back to a high of $1.1640 in January 2006. As of yesterday, the EUR/USD is at $1.31.
Remember, all the above happened whilst the US was suffering deficits both in its external and domestic accounts. The single most important factor that explains the situation is ‘relativity in growth cycles’. Back in 2002, the U.S. economy was powering up after the dot.com bust in 2000 and coming out of the recession. In 2005, Europe who was the laggard, started turbo-charging and showed stronger growth rates relative to the U.S. In late 2005 and into 2006, it was all about the strength in the U.S. economy right up to the end of Q1, 2006, plus the 17 rate hikes which converted U.S. Dollar into a favorable ‘carry trade’.
The U.S. current account deficit becomes less of an issue when there is growth in the economy. In other words, the U.S. can grow out of its deficit like it did the last time around during the Clinton administration. Of course, this is not going to be the case in 2007.
What is more important is the fact that Bernanke appears to be doing an excellent job in creating the appropriate ‘soft landing’ in the U.S……….THIS IS VERY IMPORTANT. If the soft landing is successfully achieved then the revival of the U.S. economy in the latter half of 2007 is optimistic.
What does this all mean? The near-term prospects for the U.S. is weak, hence, the U.S. Dollar will face some weakness over the next 3 months. Thereafter, it’s going to be data dependent.
Yesterday’s Straits Times had an article about the weakening U.S. Dollar because of the slower growth and anemic housing and potential interest rate cuts. All this are known symptoms for a weaker currency……….nothing new.
Our Call; weaker US Dollar into the end of Q1, 2007, Q2 will be highly data dependent and we see US Dollar strength into Q4, 2007.
Moreover, he noted that some countries in particular the oil producing countries with large US dollar reserves have begun to diversify into other currencies including Euro and Yen.
Respectfully speaking, Alan Greenspan has not always been right in his views. In this instance, we tend to disagree with his view.
The U.S. has been battling a balance of payments deficit for the past 4 years and also a domestic deficit for the past 8 years. Yet, it did not stop the US Dollar from powering against the Euro to a peak of $0.83 back in January 2002. Then losing total ground to the Euro when it hit bottom in January 2005 at $1.3580. Again, the US Dollar powered back to a high of $1.1640 in January 2006. As of yesterday, the EUR/USD is at $1.31.
Remember, all the above happened whilst the US was suffering deficits both in its external and domestic accounts. The single most important factor that explains the situation is ‘relativity in growth cycles’. Back in 2002, the U.S. economy was powering up after the dot.com bust in 2000 and coming out of the recession. In 2005, Europe who was the laggard, started turbo-charging and showed stronger growth rates relative to the U.S. In late 2005 and into 2006, it was all about the strength in the U.S. economy right up to the end of Q1, 2006, plus the 17 rate hikes which converted U.S. Dollar into a favorable ‘carry trade’.
The U.S. current account deficit becomes less of an issue when there is growth in the economy. In other words, the U.S. can grow out of its deficit like it did the last time around during the Clinton administration. Of course, this is not going to be the case in 2007.
What is more important is the fact that Bernanke appears to be doing an excellent job in creating the appropriate ‘soft landing’ in the U.S……….THIS IS VERY IMPORTANT. If the soft landing is successfully achieved then the revival of the U.S. economy in the latter half of 2007 is optimistic.
What does this all mean? The near-term prospects for the U.S. is weak, hence, the U.S. Dollar will face some weakness over the next 3 months. Thereafter, it’s going to be data dependent.
Yesterday’s Straits Times had an article about the weakening U.S. Dollar because of the slower growth and anemic housing and potential interest rate cuts. All this are known symptoms for a weaker currency……….nothing new.
Our Call; weaker US Dollar into the end of Q1, 2007, Q2 will be highly data dependent and we see US Dollar strength into Q4, 2007.
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2 comments:
I agree with what you are saying but could you also comment on the USD/SGD? Rgds, T.C. Phng
The USD/SGD seems to be losing ground, that is, Singapore Dollar keeps gaining on the US Dollar. Could you share with us your thoughts on the USD/SGD. Should I be concern if I have a significant portion of my wealth in USD? Sincerely, Prudent Lee
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