[Reuters] Swirl of near-term events may hit dollar hard

This is a seriously underreported story. The US is letting the dollar take a real pounding in the currency exchange markets. A weaker dollar helps exports but hurts imports (that is if the exporting country like China is not pegging their own currency on the dollar). Higher import prices lowers the US standard of living in the short term.

This is another reason I wonder about the current strength of the US economy. The Fed has also been giving money away for free since 9/11. The weak dollar and the low Fed rates should be jump starting the US economy.

Swirl of near-term events may hit dollar hard

Thu Jan 27, 2005 10:19 AM ET
By Kevin Plumberg

NEW YORK, Jan 27 (Reuters) - The dollar could get battered next week after riding on a collision course with high-risk events, including Iraqi elections and U.S. President George W. Bush's State of the Union speech, analysts said.

After the White House said Tuesday it expects a record U.S. budget deficit this year of $427 billion and as violence in Iraq intensified before the weekend's election, traders said sentiment has already grown more bearish on the dollar.

Analysts said the most important events next week will be a meeting of finance ministers from the Group of Seven richest countries, President Bush's speech and the Iraqi vote.

"We think the dollar is going to trade pretty badly through all of this," said Daniel Katzive, currency strategist with UBS in Stamford, Connecticut.

He expects the euro to rise four cents in as many weeks to $1.34 as the dollar resumes its long-term decline.

Iraqis will vote on Sunday in a highly charged landmark election. How high turnout is and whether heavy violence in Iraq continues through Sunday could affect the market's view on how many more dollars are needed to fund the military action.

"There is an Iraqi election premium coming into the market," said Hugh Walsh, vice president of foreign exchange with Fortis Bank in New York.

Traders were already selling dollars ahead of the election in anticipation of further instability, he added.

The Bush administration's latest budget forecast included an additional $80 billion to fund operations in Iraq and Afghanistan.

Traders will listen to Wednesday's State of the Union speech for details on the budget, particularly Bush's ambitious plan to overhaul Social Security by creating personal investment accounts, which some analysts expect could cost $1 trillion to $2 trillion over the next 10 years.

"As far as fiscal policy goes there's definitely a risk that the administration gets bogged down in very innovative Social Security reform," said Bob Sinche, head of global foreign exchange strategy with Bank of America in New York.

Other analysts are deeply skeptical that the administration can succeed in making tax cuts permanent, partially privatize Social Security, continue the war on terrorism and halve the budget deficit.

The White House is due to submit its budget proposal to Congress on Feb. 7.

U.S. fiscal policy has garnered global attention especially after American and European financial policymakers acknowledged the need for the budget deficit to shrink in order to help correct the huge shortfall in the U.S. current account -- the broadest measure of trade and investment flows across borders.

THE GREENBACK'S SOFT UNDERBELLY

These issues will be thrown into relief when finance ministers from the G7 meet in London from Feb. 4 to 5 to hash out global economic policies.

However, recent conflicting messages from China on whether revaluing its pegged yuan currency would happen soon and flat-out statements from several senior officials that no significant changes are expected in the G7 post-meeting statement have convinced analysts that few developments will come out of the meetings, they said.

Kathy Lien, chief strategist with Forex Capital Markets, a New York broker, anticipates the market will zero in on myriad reasons to sell dollars and buy euros following the meeting of the G7: rising oil prices, central banks' reserve shifts out of dollars into euros, incremental U.S. interest rate hikes by the Federal Reserve and a higher U.S. budget deficit.

Since last month Bush and Treasury Secretary John Snow have been emphasizing the importance of cutting the budget gap and have tied the health of the dollar to shrinking the deficit.

In a television interview this month, Snow said "We want to do things to sustain the strength of the dollar, among them is going to Congress to work on the deficit, to bring (it) down."

But the White House, having forecast shortly before the G7 meeting a record budget shortfall this year, has effectively set the dollar up to fall, argued David Gilmore, senior analyst with Foreign Exchange Analytics based in Essex, Connecticut.

"By making credible deficit reduction the metric for valuing the dollar, G7 has exposed the underbelly of the currency and invited new selling," said Gilmore. (Additional reporting by John Parry)

© Reuters 2005. All Rights Reserved.

 

I have read one place that in Europe right now it is trendy to NOT buy American, kinda like when we poured French wine out in the street.