Fed chairman Ben Bernanke talked up the dollar a couple of pips on Tuesday, but even before then, pundits such as Marc “Dr Doom” Faber were predicting a dollar rally. Faber last week told readers of his subscriber newsletter on gloomboomdoom.com to go long on the US dollar and that gold could fall to $800:
As outlined in last month’s report, I believe the US dollar and US equities will outperform the rest of the world. For now, I recommend a long US dollar position against the euro with tight stops. US equities are unlikely to move up strongly but should decline less than foreign equities (in particular emerging stock markets). In my opinion, the S&P500 will not make new lows for now, rally from about June 15 to mid-July and then decline meaningfully in the fall.
The inflation figures published by the BLS are a total fraud. Bonds should move lower (higher interest rates), which should support the US dollar.
But beware a false sense of security, says Peter J Cooper on arabianmoney.
The bullish crowd from Wall Street would have us believe the dollar’s fall is over and that stabilisation at 2 per cent interest rates will spark a rally after eight months of falling rates. It would be nice to think this is true. But the dollar is going to $2 per euro over the next two years.
Faber has been right on many more forecasts than he has been wrong, but it could be that the false optimism of last year is being repeated. And if there is a rally it will be short lived, adds Cooper.
Short-lived or not, the rally continued on Wednesday, with Bloomberg reporting in the Asian afternoon that the dollar traded near a two-week high against the euro on Bernanke’s comment that policymakers are “attentive” to the impact the US currency’s decline may have on inflation.
The dollar was also near a three-month high against the yen while Australia’s currency rose from a three-week low after government data showed the economy grew at twice the pace economists expected last quarter. Even Asian equity markets benefited from the Fed chairman’s remarks, as the FT reported.
“The dollar may have room to rise further,” Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow, Japan’s largest currency broker, told Bloomberg. “Bernanke has acknowledged that he’s done cutting rates, and that one of the reasons for this is he doesn’t want the dollar to fall.”
The FT’s John Authers, however, takes a characterisically tempered view:
It is highly unusual for a Fed official to say anything at all about the dollar. The signal, as far as the forex traders who bought dollars were concerned, was that Mr Bernanke was the advance guard for a coordinated attempt to bolster the dollar.
Treasury bond and Fed Funds futures prices did not react anything like as strongly as the forex markets. And Mr Bernanke does not set foreign exchange policy — that is the purview of the Treasury. Did foreign exchange markets overreact?
Probably. Much more evidence is needed before markets should assume that governments will intervene to support the dollar.
Meanwhile, Gavekal, the HK-based research and investment firm, notes that the dollar surge, equities rally and oil price decline in the wake of Bernanke’s comments may suggest a return of the “Fed fear-factor”:
At the same time, elsewhere we were reminded that if a stronger dollar does not come along and save the day—then we could be stuck with a much less attractive option. As George Soros put it in testimony before the US Senate Tuesday, that other option is recession.
While many bubbles end in crashes, Soros predicted that a “crash in the oil market is not imminent.” Indeed, he fears that the bubble in oil will continue to expand until “a recession is well and truly in place”.
But there’s reason to hope for a more benign solution, in Gavekal’s view.
It must, at this point, be obvious to the Fed that a weak dollar is a greater threat to US economic stability than the fast-healing liquidity crunch. For starters, a stronger dollar could squeeze oil bulls from the market, relieving inflationary pressures. Tuesday’s statement by Bernanke confirmed that the Fed indeed recognises this. Moreover, the dollar has more going for it than just the Fed’s support.
After all, US economic data keeps getting better (on Tuesday, it was the US factory orders), while first quarter non-financial earnings have been surprisingly solid, up 9.8% on a share-weighted basis.
Ultimately, however, says “Dr Doom”: “We are in the midst of very challenging investment times and my recommendation is to reduce positions in all asset classes on rebounds.
Gold is probably still in a long term bull market but… we are in the midst of an environment of deleveraging, which could depress prices below $ 800. In short, enjoy the summer and your tax rebates because the investment markets will bring lots of volatility but unlikely much joy!
