The dollar has yet to descend into a full-blown crisis but market watchers warn that ultra-loose U.S. monetary policy means that one could quickly materialize if the slide in the greenback gathers pace.
The dollar has dropped to new lows since Federal Reserve Chairman Ben Bernanke effectively slapped a sell sign on the currency Wednesday, with the greenback hitting historic lows against the Australian dollar and Swiss franc, and even to a major low point against the euro, which is hobbled by an ugly debt crisis.
In response, analysts and investors are growing increasingly nervous that this could snowball into a destabilizing rout that rumbles the global economy. But we aren't there yet, they say.
"Loose monetary policy in the U.S. has done good things for the postcrisis recovery, and it has bought us a lot of time. But too much of a good thing is bad for you. If this spins out of control, then it's fairly dangerous, and we're pretty close to that point," said Kit Juckes, chief currency strategist at Société Générale.
The pace of dollar selling has accelerated, with the ICE Dollar Index—which tracks the greenback on a trade-weighted basket of currencies—falling to its lowest level since August 2008. It sank to 72.871, a full 4.8% down in April and 8.4% lower since the start of the year.
"It's entirely possible that we see an all-time low on the dollar index. We could even see 70, but a 10%-15% fall is not necessarily certain," said Simon Derrick, senior currency strategist at the Bank of New York Mellon, who remains cautious about calling for an uninterrupted slide in the dollar.
But investors agree that for a full-blown crisis, the dollar would need to plummet a lot further and would need a gloomier global backdrop.
"A dollar crisis would mean weakness that resulted in the meltdown of the global financial system, and we're not there now," said Lena Komileva, senior currency strategist at Brown Brothers Harriman. "In the short term, dollar weakness coincides with very strong financial reinflation, higher stocks and commodities and tighter credit spreads, so it's good for the health of the global balance sheet."
Yet there appears little at the moment to arrest the dollar's decline. The euro continues to shrug off concerns about its indebted member states as traders focus on policy tightening by the European Central Bank. The common currency has marched higher to reach $1.4882 against the dollar Thursday, while the Australian dollar traded at a fresh 29-year high of $1.0949.
Meanwhile, Standard & Poor's announcement on April 18 that it had revised its outlook on the U.S to negative focused the market's attention on the U.S.'s eye-watering fiscal deficit and the current political stalemate there.
Exacerbating the dollar's decline are the moves of central banks, which have been very active in recent weeks, churning dollars into other currencies and diversifying their reserve holdings.
"Central bank activity has to put a headwind on any potential for the dollar to appreciate," said Pierre Lequeux, head of currency management at Aviva Investors.
Reserve diversification has so far supported the euro and other currencies to a lesser extent. Although the bulk of China's $3 trillion in currency reserves are held in dollars, Chinese officials have recently stepped up rhetoric hinting that they might start to diversify out of dollars.
This will be a slow process and is unlikely to precipitate a near-term acceleration in dollar selling. Nonetheless, the dollar remains out of favor among investors and unless this changes, the currency will remain under pressure.
Source: http://online.wsj.com
The dollar has dropped to new lows since Federal Reserve Chairman Ben Bernanke effectively slapped a sell sign on the currency Wednesday, with the greenback hitting historic lows against the Australian dollar and Swiss franc, and even to a major low point against the euro, which is hobbled by an ugly debt crisis.
In response, analysts and investors are growing increasingly nervous that this could snowball into a destabilizing rout that rumbles the global economy. But we aren't there yet, they say.
"Loose monetary policy in the U.S. has done good things for the postcrisis recovery, and it has bought us a lot of time. But too much of a good thing is bad for you. If this spins out of control, then it's fairly dangerous, and we're pretty close to that point," said Kit Juckes, chief currency strategist at Société Générale.
The pace of dollar selling has accelerated, with the ICE Dollar Index—which tracks the greenback on a trade-weighted basket of currencies—falling to its lowest level since August 2008. It sank to 72.871, a full 4.8% down in April and 8.4% lower since the start of the year.
"It's entirely possible that we see an all-time low on the dollar index. We could even see 70, but a 10%-15% fall is not necessarily certain," said Simon Derrick, senior currency strategist at the Bank of New York Mellon, who remains cautious about calling for an uninterrupted slide in the dollar.
But investors agree that for a full-blown crisis, the dollar would need to plummet a lot further and would need a gloomier global backdrop.
"A dollar crisis would mean weakness that resulted in the meltdown of the global financial system, and we're not there now," said Lena Komileva, senior currency strategist at Brown Brothers Harriman. "In the short term, dollar weakness coincides with very strong financial reinflation, higher stocks and commodities and tighter credit spreads, so it's good for the health of the global balance sheet."
Yet there appears little at the moment to arrest the dollar's decline. The euro continues to shrug off concerns about its indebted member states as traders focus on policy tightening by the European Central Bank. The common currency has marched higher to reach $1.4882 against the dollar Thursday, while the Australian dollar traded at a fresh 29-year high of $1.0949.
Meanwhile, Standard & Poor's announcement on April 18 that it had revised its outlook on the U.S to negative focused the market's attention on the U.S.'s eye-watering fiscal deficit and the current political stalemate there.
Exacerbating the dollar's decline are the moves of central banks, which have been very active in recent weeks, churning dollars into other currencies and diversifying their reserve holdings.
"Central bank activity has to put a headwind on any potential for the dollar to appreciate," said Pierre Lequeux, head of currency management at Aviva Investors.
Reserve diversification has so far supported the euro and other currencies to a lesser extent. Although the bulk of China's $3 trillion in currency reserves are held in dollars, Chinese officials have recently stepped up rhetoric hinting that they might start to diversify out of dollars.
This will be a slow process and is unlikely to precipitate a near-term acceleration in dollar selling. Nonetheless, the dollar remains out of favor among investors and unless this changes, the currency will remain under pressure.
Source: http://online.wsj.com
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