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Dollar remains strong

 
12 September 2008

The dollar continues to post impressive gains against its European counterparts, most notably the 15-nation Euro, and the British Pound…. … One Euro is currently (September 11) worth $1.3994, after dipping below $1.40 for the first time in several months Wednesday. The Pound has actually recovered a bit in 24 hours against the greenback, but is still about 30 pips off its all-time high less than one year ago. A Pound now fetches $1.7565.

The last several months have certainly given credence to a commonly held axiom in currency speculation – if you are invested in the wrong direction, just wait and the trend will reverse direction at some point in time. After hanging around in the mid-$1.40s for much of early 2008, the Euro cleared $1.60 twice, most recently in July. Remarkably, in only about two months, the Euro has fallen over 20 pips against the buck. Even in hyper-speculative currency times, this is a powerful move.

Though it did not reach its all-time high over $2.06, which was touched in late 2007, the Pound did clear $2.00 for the last time in July as well. Again, the dollar gains are impressive, with a 25 pip drop in the Pound’s relative value in the same two month timeframe.

Why has the dollar turned so strongly against the major European currencies? Many factors could be considered. The most obvious connection is that the dollar tends to benefit the most when oil prices fall. Oil prices have dropped steeply since peaking over $147 per barrel in mid-July. Thus, the oil slide correlates directly with the dollar’s movement against the Euro and Pound.

Another recent economic reason is growing concern that many major European economies are on the verge of suffering some of the same economic challenges that have hampered the US for the last couple years. Interestingly, the dollar is stronger against most major currencies yet analysts have recently wondered if a recession is still possible given retail struggles and other data indicators. However, like many financial markets, currency speculation is driven by anticipation and reaction. Some are now anticipating rough waters ahead in Europe.

The dollar has moved against other major currencies, though not necessarily as much. After briefly surpassing 110 yen, the dollar has dropped back to near 107 yen. The dollar-yen ratio is more negatively affected when the stock markets are down due to carry trade selling. The dollar is also near 1.14 Swiss francs after falling below par several months ago.

Many economists would say the dollar’s recent strength against its counterparts has much to do with other market factors, such as the falling oil. However, the dollar’s strength has provided some functional and psychological benefits for investor’s and American consumers. A stronger dollar has combined with fallen oil helped to help keep gas prices down. Consumer prices have been somewhat held in check as well with a stronger dollar. In the midst of some dreary data recently, some good news came in the form of moderate inflation, which helped ease some concerns. In fact, some analysts are again calling for another rate cut to spark the economy now that inflation seems okay.

Psychologically, a better dollar offers something for consumers to be hopeful about. If the dollar remains firm, it should help moderate wholesale and consumer prices that have touched historic highs in recent months.

Market Recap

Stocks gained modest ground Wednesday. The Dow climbed 38 points, while the NASDAQ and S&P were up 18 and 7. Lehman presented a plan to Wall Street for its recovery. Oil prices fell. The dollar made significant moves against the Euro and British Pound, reaching territory unseen for several months. The Euro fell below $1.40 and the Pound dropped below $1.75. The gains were a bit stronger Thursday despite credit concerns. The Dow jumped 164 while the NASDAQ and S&P picked up 29 and 17. Thirty year fixed mortgages hit their lowest rate point since April. According to bankrate.com, average 30-year fixed loans were 5.78 per cent Thursday.

Neil Kokemuller
Thursday, September 11, 2008
11:43 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.

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