Short-Term Dollar Rally Likely
NEW YORK (
) -- The dollar is poised for a short-term bounce as the sell-off in anticipation of quantitative easing may have been overdone and European debt problems resurface.
The dollar index has shed 8% since early July, while stocks have gained 17%. Expectations of quantitative easing have dominated the dollar trade, with fears of the eurozone's debt problems retreating to the background.
"The dollar
selloff is overdone here. We are not that far away from the March 2009 lows for the dollar," said Ralph Fogel of Fogel Neale Partners. "In the short-term it could rally....5% in the next four to six weeks is a very good possibility."
Over a longer period, Fogel expects continued weakness in the greenback unless the U.S. moves to significantly cut its fiscal spending and debt burden. Other analysts also expect the dollar downtrend to continue after a shallow rally, as fundamentals weaken in favor of other currency markets in Asia and emerging markets.
"In the immediate term there is a strong possibility of the dollar rallying," said Adrian Day, founder of Adrian Day Asset Management, that manages money for clients in global and resource markets. "But the rally will not be based on fundamentals, but purely on market factors. The dollar has declined too far."
James Dailey of Team Asset Management, however, believes dollar movements may be more nuanced in the future, appreciating against certain currencies while weakening against others. In particular, the dollar is likely to strengthen against the euro, as debt problems in the Ireland and Greece rear their ugly head once again.
"All the euphoria about assets going up
due to quantitative easing has overlooked the problems in Europe," he told
TheStreet
on Tuesday, as Irish debt problems resurfaced and drove the dollar higher. "The euro could go down a good bit lower versus the dollar. The ECB (European Central Bank) may end up doing their own monetization of debt."
A short-term rally of the dollar against the euro could mean a correction for stocks going by recent trends. "For the past few years, investors and traders appear to have developed a Pavlovian response to the US dollar/euro exchange rate. If the US dollar rallies versus the euro, investors/traders sell risk assets such as stocks and commodities, while if the US dollar declines versus the euro they do the opposite," Dailey notes in his blog post.
Still, Dailey said it is entirely possible that dollar and stocks could rally simultaneously. "The seemingly inverse relationship between the US dollar and stocks is not something which has been in force always and forever."
According to Dailey, the dollar index might well show some signs of strength even though it continues to weaken against Asian currencies as the index is more heavily weighted on the euro, the pound sterling and the Japanese yen.
So, if the dollar strengthens against European currencies alone, that is enough to push the index higher. That won't stop commodity currencies such as the Australian dollar, the Brazilian Real or the Candian dollar from appreciating as demand for commodities rise. Asian currencies will likely continue to strengthen as countries such as China and India continue to raise interest rates as they combat inflation.
Stock markets aside, the short-term fluctuations in the dollar could have implications for a wide range of companies from
Caterpillar
(CAT) - Get Report
to
Chevron
(CVX) - Get Report
to smaller tech companies.
A surprise upside to the dollar might upset the financials of companies that are not sophisticated enough to handle volatile swings in currencies, according to Wolfgang Koester, CEO and Chief Currency Strategist at FiREapps, a consultant that helps companies manage currency exposure. "The surprise in the dollar is going to be on the upside not the downside," said Koester. "The issue for corporations is volatility
in currencies. Continuous intervention by countries is worrying corporations," he added.
Koester said companies still guide in constant dollar terms and are not acknowledging their currency problems. But in the long term, companies that fail to manage their currency will show greater unpredictability in their cashflows.
-- Written by Shanthi Venkataraman in New York
>To contact the writer of this article, click here:
Shanthi Venkataraman
.
>To follow the writer on Twitter, go to
.
>To submit a news tip, send an email to:
.
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.
