Strong-Dollar Policy May Survive Election
The official currency policy of the US administration in the years ahead will continue to be that a strong dollar is in the best interests of the country, no matter who wins next month’s presidential election, analysts say.
While the victor will continue to pay lip service to such a policy, however, he is unlikely to stand in the way of an orderly decline in the dollar.
The Bush administration still adheres to the strong-dollar policy, which is the legacy of former treasury secretary Robert Rubin and the Clinton administration, says David Gilmore, partner and economist at Essex, Connecticut-based Foreign Exchange Analytics.
Senator John Kerry, the Democratic candidate for president, also believes in the Rubin dollar policy, Gilmore says. Rubin is one of Kerry’s top economic advisors.
“The bottom line is that there is little difference in substance but some difference in emphasis on dollar policy,” Gilmore says.
“Arguably, Kerry would be more inclined to intervene in the foreign exchange market if the dollar were overshooting to either the upside or the downside,” he says. “How much more? A shade more perhaps.”
But even the anti-activist Bush administration would never say “never” to intervention and likely would offer support in the event that a dollar decline began to get out of hand, Gilmore says.
It would take extraordinary circumstances for the Bush team to talk down the dollar going into the election, given concerns over funding the current-account deficit, which has reached 5% of gross domestic product, he says.
Ashraf Laidi, chief currency analyst at MG Financial Group in New York, says currency traders will pay more attention to economic fundamentals than to the question of dollar policy.
“It is hard to imagine that a Bush victory would bring the weakness of the dollar to an end,” Laidi says. “There is unlikely to be a rise in the dollar based on the rationale of the dollar policy of either of the candidates.”
According to Laidi, the recent acceleration in the rising US trade deficit is alarming.
“Just as alarming is the highly negative correlation with the deficit and the inflow of capital to the US, which is mainly going into the US treasury bond market,” he says.
“What would happen if China and Japan don’t continue to escalate their purchases of US bonds? What if they stop or slow their purchases?” he asks.
Laidi says that while central banks that hold large amounts of US treasury securities may not want to sell their holdings for fear of depressing the market, many private investors will not feel any such restraints.
Strong-Dollar Policy May Survive Election
Growing Economy Lifts Brazil’s Real
The Brazilian currency is getting a rise from a recovery in the nation’s economy, which grew at the fastest rate in eight years in the second quarter of 2004.
The real rose by 5% against the US dollar in July and August combined, bringing its gains to 21% since President Luiz Inacio Lula da Silva took office in January 2003.
Brazil’s gross domestic product grew 5.7% in the second quarter from the same period a year earlier, following a 2.7% expansion in the first quarter, signaling an end to the country’s recession.
A series of interest-rate cuts by the central bank has helped to stimulate a surge in consumer spending.
GOL Linhas Aéreas Inteligentes, Brazil’s low-fare airline, raised its guidance for full-year 2004 earnings on August 31, based on the improved foreign exchange rate environment.
“We expect the stronger Brazilian currency to positively impact our dollar-denominated and dollar-linked expenses in the third and fourth quarters and to improve overall earnings for the full year 2004,” according to the company.
About half of GOL’s operating expenses are either denominated in US dollars, such as aircraft-leasing expenses, or are dollar-linked, such as jet fuel.
UK Pound Begins Looking Peaked
Recent UK economic data have come in weaker than expected and could portend a significant decline in the British pound, analysts say.
“Fundamental and technical considerations are lining up for a sharp setback in sterling against the dollar,” says Marc Chandler, chief currency strategist at HSBC Bank USA in New York.
Chandler says there is a potential for the pound to fall as low as $1.73 before the end of the year.
“The key fundamental development has been the moderation in the home-price rise and the economy,” he says.
The UK purchasing managers’ index slipped to 53.1 in August from 56.3, and the month-to-month increase in the average house price was just 0.1%. The weakness in manufacturing reflected a slump in exports that was particularly worrisome, Chandler says. The survey of retail sales in August also was weak.
On a technical basis, the key consideration is a “head and shoulders” pattern that has been traced by the pound in recent months, which is often a sign of a topping-out in the market.
Market participants are moving toward the assumption that UK rates have peaked, says Anne Mills, director of currency research at Brown Brothers Harriman in New York.
“We still think one more hike is possible, but even that view has negative implications for sterling,” she says.
Bank of Japan Seeks Normal Rate Policy
With Japan’s economy growing again, the Bank of Japan will return to an ordinary interest rate policy in the future, says BOJ governor Toshihiko Fukui.
“We are strongly committed to keeping an easy policy for now, but we will need to return to an interest-rate policy,” Fukui told a press conference in early September.
Such a policy would mean targeting a specific interest rate, rather than the quantitative approach in effect at present, says Anne Mills of Brown Brothers Harriman.
The growth of the monetary base slowed again in August, to 4.6% year over year from 4.7% in July, and from 20.5% a year earlier.
Mills says this reflects the fact that the central bank is no longer increasing bank reserves, while consumers are becoming less worried about bank failures, which leads them to demand less cash.
· Gordon Platt