Sunday, April 30, 2006

Dollar headed downward?

The London Times is reporting that...

THE dollar has embarked on a big decline that will see it fall against all leading currencies, according to analysts.

The plunge is being prompted by America’s $800 billion (£438 billion) current-account deficit, they say.

The dollar has been under pressure following last weekend’s meeting of G7 finance ministers and central bankers, which emphasised “global imbalances” and said currencies should reflect economic fundamentals. Then China raised its key interest rate to 5.85%, its first hike for months, and Ben Bernanke, the new Federal Reserve chairman, hinted that American rates would pause at 5% after a rise in May.

Analysts say that without interest-rate support, the dollar will be weighed down heavily by America’s imbalances.

“I think this is it,” said Tony Norfield, global head of currency strategy at ABN Amro. “The dollar has been supported by high yields but markets are saying that is no longer enough. The question for policymakers is going to be how to manage the dollar’s decline. It won’t be a one-way street but the fall is likely to be biggest against Asian currencies.”

The euro has already risen to an 11-month high of more than $1.26, while the dollar is at a three-month low of 113.70 against the yen. The Canadian dollar, known by traders as the “loonie”, rose to a 28-year high on Friday, boosted by a hike in Canadian interest rates.

Sterling climbed back above $1.80, closing above $1.82 in New York on Friday.

The Bank of England’s monetary policy committee is set to leave rates unchanged at 4.5%, despite a call from the National Institute of Economic and Social Research for a pre-emptive rise.

The “shadow” MPC, which meets under the auspices of the Institute of Economic Affairs, has voted 7-2 to leave rates unchanged.

Then again, there's a similar hint from the NY Times:

Those who follow a buy-and-hold strategy but want to buffer their holdings against currency shifts may be interested in a small but growing category of investments: foreign currency mutual funds.

Until last year, there was only one: the Franklin Templeton Hard Currency fund, which has been around since 1989. But in the wake of the dollar's big decline in 2004, a few more foreign currency funds began trading last year, and mutual fund analysts predict that more are likely to follow.

Franklin Templeton Hard Currency is the largest in the field, with $214 million in assets. It essentially bets against the dollar, with holdings in short-term foreign-denominated fixed-income securities from a variety of countries. It is generally designed to rise sharply when the dollar takes a big fall — but it is likely to decline in periods when the dollar is surging. At other times, it should return money market rates. So far this year, it has gained about 6.4 percent.

A fund with a similar strategy, the Merk Hard Currency fund, began trading last May and has garnered about $11 million in assets. It has returned 6.6 percent this year.

While these returns are substantial for just four months, some mutual fund analysts say that the main reason to invest in the funds would be for diversification in portfolios that don't already have a big stake in foreign stock or bond funds. "Someone with most of their investments in domestic assets has a lot of their risk concentrated in the dollar," said Jeet Dutta, a fund analyst at Morningstar, who likened investing in foreign currency funds to buying insurance against a big decline in the dollar.

Of course gold's been on a tear, as has FXE, the Euro "money market-like" ETF.


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