Ashraf Laidi, chief currency analyst for MG Financial Group, thinks the
dollar will continue to rise as long as the Fed keeps raising interest
rates. But eventually, he says, "the combination of renewed
acceleration in the U.S. trade deficit with the looming conclusion of
the Fed's tightening campaign could pave the way for the next dollar
decline."
11/28/05
The Dollar's Draw
What's behind the surprising strength of the greenback?
By Paul J. Lim
When a nation's currency strengthens, it's usually a sign of growing
confidence in that country's economy.
More from Money & Business
But the dollar has been rallying of late--it is near a two-year high
against the euro--amid growing concerns about the domestic economy.
Investors are worried that the United States has the worst prospects
for corporate profit growth in the world. Meanwhile, the federal
government is running massive budget deficits and importing far more
goods and investment than it exports. Yet somehow, "warts and all, the
U.S. remains among the most popular destinations in the world for
foreign capital," says Joseph Quinlan, chief market strategist for Bank
of America's Investment Strategies Group.
In September, net inflows of foreign capital jumped 15 percent to a
record $101.9 billion, pushing the dollar higher in its wake. About $51
billion went into corporate bonds, nearly $22 billion was used to
purchase treasury securities (financing the U.S. debt), and nearly $25
billion went into U.S. equities. That's the highest level of foreign
demand for U.S. stocks since before the bear market of 2000.
But foreign desire for U.S. equities probably reflects less newfound
faith in the American economy than it does growing concerns about
prospects for Europe. Last week, the European Commission lowered its
forecast of the region's economic growth from 2 percent to 1.5 percent
for this year. By contrast, the U.S. economy is expected to expand 3.5
percent this year and an additional 3.4 percent in 2006. Also, while
the European Central Bank has been holding interest rates fairly
steady, the Federal Reserve has hiked a key short-term interest rate
from 1 percent last May to 4 percent. And long-term U.S. bonds are
yielding considerably more than foreign debt.
Ashraf Laidi, chief currency analyst for MG Financial Group, thinks the
dollar will continue to rise as long as the Fed keeps raising interest
rates. But eventually, he says, "the combination of renewed
acceleration in the U.S. trade deficit with the looming conclusion of
the Fed's tightening campaign could pave the way for the next dollar
decline."
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