Crescenzi: No Breakout in the Dollar
I have for many years been in the camp that expects the U.S. dollar to decline in value. My main thesis has been that the world's central banks would choose to diversify their reserve assets, which had been heavily concentrated in dollars despite the obvious changes that have occurred in the global economic scene.
In 2002, for example, data from the Bank for International Settlements show that the U.S. dollar represented 70% of the world's reserve assets, while the euro represented 20% of reserve assets. Since that time, there has been a 7-point shift, to 63% for the dollar and 27% for the euro. It is quite plausible that the mix could move to 60%-30%.
That said, although I believe the dollar is in the midst of a secular decline, there will be interruptions in the decline. The last time I called for this was at the end of 2004, when I projected a rally in the dollar in 2005 on the basis of a firming in the economy and higher interest rates. The dollar did in fact gain that year, and 2005 proved to be the only year of gains in the past seven years.
While I do not expect a significant rally in the time ahead, chiefly because the U.S. economy is not strong enough and because the
Fed
is likely to move slowly on rates, there is a chance at a rally in the dollar on the basis of improved conditions in the credit markets, signs of a shallow recession, purchasing power parity and anticipation of eventual rate hikes.
In addition, the commodity rally could simmer down, affecting both the direct beneficiaries of higher commodity prices and the indirect beneficiaries (i.e., those countries on the receiving end of cross-border deposits). This will push money toward dollar assets, even if only briefly.
There has been no breakout in the dollar. The Fed's trade-weighted dollar index closed at 70.62 yesterday. While this is up from the recent low of 69.26, it is obviously not far from the low, and it is also below the recent high of 71.50.
Taking a look at this from afar, five years ago the trade-weighted dollar index was trading in a range of 90 to 95.
Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic,
The Money Market
, first published in 1978 by Marcia Stigum, and
The Strategic Bond Investor
. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback;
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