Dollar Rebounds On Tuesday– Analysts Feel That Its Just A Small Blip In Dollar’s Downward Slide
Maybe just a small blip in dollar’s downward slide but definitely worth noticing. The dollar on Tuesday rebounded from its 15 month low on Monday. Looks like Federal Reserve Chairman Ben Bernanke comment in favour of strong dollar helped the currency as traders trimmed longer-term bets against the currency.
On Monday Bernanke commented that the Fed is very much looking into the implications of changes in the value of dollar as US interest rates reach rock bottom levels. This was interpreted by traders as an indication that the Fed is worried about the current depreciation which can increase inflation in the economy. European Central Bank President Jean-Claude also came in support of the dollar. He clearly mentioned that a strong dollar is in the U.S. interest and that there are no plans for euro to act as a reserve currency in the near future.
The impact of this interpretation was clearly seen as the dollar index increased by 0.3% to 75.17 after hitting a 15-month low of 74.679 on Monday. The euro declined by 0.4% to $1.4910 down mainly on account of profit booking and options-
related selling around $1.50. Early in the day the euro had briefly increased above $1.50 but was unable to hold that level. Against the yen the dollar was unchanged at ¥89.05 after reaching a low of ¥88.74 earlier in the day. Against the Canadian dollar, US Dollar increased to 1.0524 Canadian dollars from 1.0467 late Monday, and against Swiss francs gained to 1.0175 Swiss francs from 1.0068 francs.
Investors and analysts feel that dollar’s decline so far is understandable but the commitment to continue to keep interest rates at such low levels can only increase the potential of dollar being used for carry trade. President Obama’s visit to China is also being closely monitored though nothing great in terms of exchange rate regime is expected of it. Analyst feel that for dollar’s downward trend to reverse either Fed has to increase rates which has been literally ruled out or China has to take steps towards a more flexible exchange rate regime. China is so important because U.S. manufacturers feel that the Yuan which is pegged to the dollar is undervalued. Hence Chinese exporters get price advantage against U.S. companies. In the recent meeting with President Obama Chinese president Hu Jintao made no commitment regarding yuan. Hence with both these requirements unlikely to be fulfilled atleast in the near future, the dollar in all likelihood with continue on its downward trend.
Meanwhile in other development the treasury department released data stating that the foreigners’ demand for long-term U.S. financial assets increased in September with China which is also the biggest foreign holder of U.S. Treasury bond increasing its stock of government debt. Continued investment in Treasury bonds is critical for US to finance its record high budget deficit. Hence in conclusion the two main factors responsible for dollar’s decline namely the high budget deficit and low interest rate are very much at work.
