Short view By Philip Coggan - Financial Times
Short view
By Philip Coggan
Published: April 26 2006 03:00 | Last updated: April 26 2006 03:00. Copyright by The Financial Times
The pressures for a further dollar decline are mounting. The latest piece of evidence came in the form of a second consecutive 15-year high in the Ifo survey of German business sentiment. Together with some stronger-than-expected German inflation numbers, the survey will keep up the pressure for higher eurozone interest rates.
There have been false dawns in the Ifo before. But Fathom Consulting points to the surge in the survey's current conditions element as opposed to expectations. The current conditions number is above the expectations figure for the first time since 2001. Past Ifo improvements have petered out as optimistic expectations have proved to be unfulfilled.
With the Fed having signalled the near-end of monetary tightening, the likelihood is that eurozone rates will rise more often than US rates. And that will narrow the yield differential that has been supporting the dollar.
The G7 finance ministers' statement has also helped to push the dollar lower. They seemed to agree that the dollar should fall, but there was more limited agreement about which currency it should fall against. Everyone wants the renminbi to rise, except the Chinese who are determined to take their own sweet time. In the meantime, neither the Europeans nor the Japanese want their currencies to take the bulk of the strain.
Another factor that should concern the dollar bulls is the absence of any safe haven support. Middle East tensions have in the past prompted investors to rally to the dollar and to Treasury bonds, even when the US has been an integral part of those tensions; this time round, gold and the Swiss franc seem to be the beneficiary. With President George Bush's poll ratings at lows for his administration, and some tricky mid-term elections ahead in November, perhaps the US does not seem an oasis of calm.
Meanwhile, the US current account deficit is not going away. While events may be moving in the right directions to reduce this imbalance (European and Japanese growth is picking up, US growth may slow later this year), it is unlikely that a growth gap will make much of a dent in the deficit. The dollar will have to take some of the strain.
By Philip Coggan
Published: April 26 2006 03:00 | Last updated: April 26 2006 03:00. Copyright by The Financial Times
The pressures for a further dollar decline are mounting. The latest piece of evidence came in the form of a second consecutive 15-year high in the Ifo survey of German business sentiment. Together with some stronger-than-expected German inflation numbers, the survey will keep up the pressure for higher eurozone interest rates.
There have been false dawns in the Ifo before. But Fathom Consulting points to the surge in the survey's current conditions element as opposed to expectations. The current conditions number is above the expectations figure for the first time since 2001. Past Ifo improvements have petered out as optimistic expectations have proved to be unfulfilled.
With the Fed having signalled the near-end of monetary tightening, the likelihood is that eurozone rates will rise more often than US rates. And that will narrow the yield differential that has been supporting the dollar.
The G7 finance ministers' statement has also helped to push the dollar lower. They seemed to agree that the dollar should fall, but there was more limited agreement about which currency it should fall against. Everyone wants the renminbi to rise, except the Chinese who are determined to take their own sweet time. In the meantime, neither the Europeans nor the Japanese want their currencies to take the bulk of the strain.
Another factor that should concern the dollar bulls is the absence of any safe haven support. Middle East tensions have in the past prompted investors to rally to the dollar and to Treasury bonds, even when the US has been an integral part of those tensions; this time round, gold and the Swiss franc seem to be the beneficiary. With President George Bush's poll ratings at lows for his administration, and some tricky mid-term elections ahead in November, perhaps the US does not seem an oasis of calm.
Meanwhile, the US current account deficit is not going away. While events may be moving in the right directions to reduce this imbalance (European and Japanese growth is picking up, US growth may slow later this year), it is unlikely that a growth gap will make much of a dent in the deficit. The dollar will have to take some of the strain.
posted by Carlos T Mock at 4:22 PM
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