Is the dollar facing collapse?
The dollar may have staged a marginal recovery last week, but the outlook for the greenback remains bleak. The key currency influences all point to a lower dollar - but could an all-out collapse be on the cards?
Dollar bills are looking rather scrunched up,' says John Authers in the FT. The greenback posted a marginal recovery last week after hitting an all-time low of almost $1.37 against the euro a fortnight ago, and it also recently touched a 26-year low of more than $2 to the pound. On a trade-weighted basis - against a basket of its major trading partners' currencies - it has fallen by around 27% over the past five years.
There are several influences on currencies and, as Edward Hadas points out on Breakingviews.com, all of them are pointing to a lower dollar'. A key factor over the short to medium term is interest rates; high rates boost the yield on a currency's assets. With US growth disappointing - the IMF expects it to marginally underperform Europe in 2007 - many analysts are pencilling in US rate cuts later this year; in Europe and the UK, they are set to rise. Stronger growth outside the US means there's a depreciation bias in the dollar', Kenneth Rogoff of Harvard University told Bloomberg.com. Meanwhile, US inflation is uncomfortably high, which undermines the dollar's appeal as a store of value, notes Hadas.
Then there's the key long-term influence on currencies, the current-account balance. The US current-account deficit appears to have stabilised of late, but it still comprises a scary' 6% of GDP, says Hadas. Given all this, it's no wonder BNP Paribas is expecting the dollar to fall to $1.40 amid a hard landing in the US, while Rogoff foresees another 10% drop in the trade-weighted index by the end of 2008.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
And a dollar collapse cannot be ruled out', says the FT. The hole in the current-account deficit is being plugged by purchases of US government bonds by oil-producing nations and, crucially, Asian central banks determined to keep their currencies low against the greenback to bolster their exports. China's reserves alone amount to about $1.2trn. A further decline in the dollar could push forward the day on which the world's dollar holders begin to worry that they have a trillion or two too many', says Dailyreckoning.co.uk. The FT highlights IMF worries that investors appear increasingly willing to dump their underperforming dollar holdings. So the dollar looks set to either keep drifting lower - or plummet. The latter, says Dailyreckoning.co.uk, should cause real excitement' in world markets.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
-
Annual UK rent jumps £3,240 since Covid, says Zoopla
Zoopla finds rental costs have risen 27% since 2021, with rental costs far outstripping wages over that period
By Chris Newlands Published
-
The top stocks in the FTSE 100
After a year of strong returns for the UK’s flagship index, which FTSE 100 stocks have posted the best performance in 2024?
By Dan McEvoy Published