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WSJ.com - Dollar Rebound Builds On Stronger Economic Data
Page 1 of 3
May 16, 2005
PAGE ONE
Dollar Rebound Builds
DOW JONES REPRINTS
On Stronger Economic Data
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By CRAIG KARMIN
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Staff Reporter of THE WALL STREET JOURNAL
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May 16, 2005; Page A1
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After a long stint as the 98-pound weakling of major currencies,
the dollar has put on some muscle in recent months, forcing currency traders to revamp their
outlooks and giving a break to Americans traveling abroad.
The U.S. currency jumped Friday1 to its highest level against the euro in nearly seven months,
against the Canadian dollar in seven and a half months, and against the British pound in nearly six
months. The euro, which was trading as high as $1.36 in January, was at $1.26 Friday; it has
fallen about 7% this year against the dollar.
The U.S. Dollar Index against major currencies last Friday posted its first weekly close above its
55-week moving average since April 2002. That's a key resistance level, a kind of psychological
barrier that helps define which way the market is moving. Breaking through it could persuade
many currency traders that the dollar will continue higher. Commodity prices, which tend to move
in the inverse direction of the dollar, also slumped last week.
Some think that 2005 could mark a transitional year, one in
which the euro loses its role as the highest-flying currency
against the dollar and Asian currencies take over the
leadership role when the dollar turns down again, as dollar
skeptics expect it to do.
"The euro's day in the sun could be coming to an end even
if the dollar bear market continues," says Steven Sewell,
chief currency strategist for Citigroup Inc. in London. He
suggests that the yen will see the biggest gains once the
dollar rally cools, pointing to Japan's exposure to the fast-
growing Asian economies and potential gains in sympathy
with any appreciation of the Chinese yuan.
Some strategists and currency managers attribute the
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WSJ.com - Dollar Rebound Builds On Stronger Economic Data
Page 2 of 3
dollar's newfound strength in part to encouraging U.S.
economic data and worsening economic and political reports from Europe. They also cite a pause
in the speculation that China is about to revalue its currency. Such speculation has been a source
of downward pressure on the dollar.
Long-term structural issues, such as the trade deficit, still bedevil the U.S. currency. But a
stronger dollar has an upside for the economy. It could ease concerns about U.S. inflation by
reducing the cost of imports. A stronger currency also makes U.S. stocks and bonds more
attractive to international investors.
Perhaps more important, it could take some heat off Asian and other central banks, which have
been under pressure to diversify their foreign reserves into other currencies because a falling
dollar was eroding the value of their holdings.
A stronger dollar could also make U.S. goods more expensive abroad, and so squeeze American
exporting manufacturers. But after a long decline, the dollar would have to rise considerably
before that becomes a major concern (See related article2).
The dollar's unanticipated resilience suggests that global investors may be taking a more benign
view of the U.S. economy and its structural imbalances than they did a few months ago. U.S.
consumers' appetite for imported goods and the weak performance of American exports has
sustained a huge trade deficit, but a recent narrowing of the gap has eased fears, at least
temporarily, that ballooning deficits could spark a crisis. Fresh signs of jobs growth and strong
retail sales have made concerns about an economic slowdown look slightly overblown.
Friday's report that April import prices were higher than expected has fueled expectations that the
Federal Reserve will continue raising interest rates, which could attract foreign capital at a time
when European and Japanese rates are stagnant.
Despite this change in sentiment, few analysts are ready to declare that the dollar bear market is
over. U.S.-friendly data have turned traders' attention to cyclical factors -- such as comparative
economic growth and interest-rate levels between the U.S. and its major trading partners -- that
tend to favor the dollar.
The better-than-expected trade figures, meanwhile, moved the structural concerns of widening
U.S. trade and budget deficits into the background. Analysts are skeptical that one trade report
heralds a sustainable trend. They suggest that any ballooning of the trade gap in the months ahead
could return the focus to America's structural imbalances, pressuring the dollar again.
But Europe has its own structural problems. Germany and Italy have slashed their economic
growth forecasts. European surveys of consumer confidence and manufacturing activity show that
sentiment is worsening. German bond yields recently fell to near 50-year lows, underscoring a
growing interest-rate differential with the U.S. European finance ministers recently eased limits
on budget deficits for the 12 countries participating in the euro, a move that was immediately
criticized by the European Central Bank as fiscally irresponsible and potentially detrimental to the
euro.
"There are plenty of reasons to believe the euro has topped out," says Adnan Akant, a managing
director for Fischer Francis Trees & Watts, a New York-based money-management firm.
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WSJ.com - Dollar Rebound Builds On Stronger Economic Data
Page 3 of 3
Recent upbeat U.S. economic data combined with weak numbers from Europe have prompted
analysts at Barclays Capital and Bank of America to adjust their year-end forecasts of the euro in
favor of the dollar. Barclays sees the euro trading at $1.25 six months from now, revised down
from a previous $1.30 forecast, while Bank of America now sees the euro falling to about $1.20
over the next few months. Analysts at UBS indicated they will be watching closely to see if they
need to change their forecasts, too.
Despite Europe's relentlessly sluggish economy, the euro was able to rally from 2002 to 2004
because most traders felt it looked undervalued at a time when the market became preoccupied
with American economic imbalances. International investment flows also began to move from the
U.S. stock market into German and other European bond markets, offering support to the euro at
the expense of the dollar.
Technical factors also helped: The euro is the most easily traded currency against the dollar; and
unlike many Asian central banks, the European Central Bank has mostly steered clear of
intervention.
Those seeking to bet against the dollar may increasingly turn to Asia. The Bank of Japan, which
actively bought dollars in 2003 and early 2004, has been showing a greater tolerance for allowing
the yen to appreciate. Anticipation that China will revalue its currency peg to the dollar -- likely
allowing the yuan to rise and fall with supply and demand -- also could provide a tailwind for the
yen and other Asian currencies.
Write to Craig Karmin at craig.karmin@wsj.com3
URL for this article:
http://online.wsj.com/article/0,,SB111620574798834235,00.html
Hyperlinks in this Article:
(1) http://online.wsj.com/article/0,,SB111597332360232802,00.html
(2) http://online.wsj.com/article/0,,SB111598680555332897,00.html
(3) mailto:craig.karmin@wsj.com
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5/18/2005
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