NEW YORK – It may be too soon to call the dollar’s recent rise a full-fledged turnaround. And there may be some in corporate America who are just fine with that.
After being beaten and battered for the last few years, the greenback appears to be emerging from its funk by making significant gains in recent months against the currencies of major trading partners.
That’s surely a positive development if you consider what it could do for the economy, and how it would cut travel costs for anyone venturing abroad. But is this good news all around? It may depend who you ask.
There weren’t expectations for this kind of turn in the dollar this year. The U.S. currency had been stuck in a downward slide, and it didn’t look likely that there was much out there to get it off that course.
It’s most recent sell-off began last May and extended through the end of last year, with the greenback losing about 12 percent of its value against a trade-weighted basket of other currencies, according to the Federal Reserve.
That’s why its recent moves have been so surprising. The dollar has surged about 8 percent this year against the euro, the currency used by 12 European nations, and is now trading near a seven-month high. It has tallied similar gains against the British pound, Swiss franc and Canadian dollar, too.
Many things are feeding this bounce. Most importantly, the U.S. economic climate looks better to investors than what is going on elsewhere in the world. Job growth appears to be healthy, as does consumer spending. The economy, while not racing ahead, is accelerating at an acceptable pace.
Also fueling the dollar’s climb is the Fed’s raising of interest rates eight times since last June, which make short-term dollar-denominated investments more attractive, and speculation that China will take its time in delinking its currency from the dollar, despite pressures from the United States. Commodity prices have also slumped recently, and they often have an inverse relationship to the dollar.
“There has been this sort of parachute for the dollar seen recently,” said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Conn., “and that has largely coming from the compelling economic story that we have here.”
Should the dollar continue its upward climb, it could knock down oil prices and the cost of other imported goods. And that could keep inflationary pressures in check because domestic producers would have less need to raise prices to maintain their competitive position in the marketplace, said Wells Fargo senior economist Scott Anderson. If all that happened, it could give a nice jolt to the economy.
But the big unknown is whether this trend in the dollar has staying power. The way Gilmore explains it, the recent about face in the dollar’s direction signifies that sentiment in the market is “less bearish as opposed to bullish.”
By that he means there still are major obstacles standing in the way of a long-term dollar rally. Topping that list: the super-sized U.S. trade and current-account deficits, which could eventually scare off foreigners who think investing here would be too risky.
While no one expects a foreign exodus to happen, it still would be troubling if the huge deficits spur some investors to look elsewhere to put their money. After all, foreigners own about 48 percent of Treasurys and 25 percent of U.S. corporate debt, according to The Bond Market Association.
Still, not everyone would complain if the dollar reversed its current course. Weakness in the dollar has aided U.S. exporters, such as heavy equipment manufacturer Caterpillar Inc., cosmetics giant Revlon Inc., and appliance maker Whirlpool Corp., whose products have been cheaper overseas when compared with those items manufactured in local foreign markets.
U.S. companies that do business abroad also benefit from a falling dollar. They eventually have to convert the money they make abroad back to dollars when calculating earnings, so when foreign currencies are strong, offshore profits count for more than they otherwise would.
It’s also important to note that while a strong dollar has historically helped stocks by driving up foreign demand, that hasn’t been the case in recent years.
While investors talk of dollar depreciation as a negative development, it turns out that the best legs up in the stock market in 2003 and 2004 happened during times of steep dollar declines. The rising dollar also hasn’t helped stocks at all over the last half year, according to Steven Wieting, a senior economist at Citigroup’s Smith Barney securities division.
Of course, it is too soon to tell if the dollar’s recent upward trend is here to stay. And no doubt where market players want the dollar to go will depend largely on what they could gain from its next move.
By Rachel Beck
Source: Yahoo News
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