Dollar continues slide, but rally in near future not far-fetched

Tuesday, April 26th, 2011 By

George Washington's portrait on a dollar bill

The U.S. Dollar Index is approaching its all-time low, but a number of factors may signal a rebound for the greenback. Image: Flickr/iChaz CC-BY-SA

Continuing a prolonged slide, the U.S. dollar fell in value to nearly its lowest level since August 2008 Tuesday against the currencies of major U.S. trading partners. Analysts say that Federal Reserve policies of low interest rates and billions in bond purchases, plus international worries about the U.S. debt situation are keeping the dollar down. Analysts also say that much like interest rates, what goes down must eventually come up and the U.S. dollar could be a profitable long-term investment.

Inside the U.S. Dollar Index

The U.S. Dollar Index (USDX) has fallen 2.7 percent in April and 6.6 percent so far in 2011. The USDX is a measure of the value of the U.S. dollar weighted against a basket of foreign currencies that includes the euro, pound sterling, Canadian dollar, Swedish krona, Swiss franc and Japanese yen. Upon its inception in 1973, the USDX was 100.000. In February 1985 it peaked at 148.1244. On March 16, 2008, the USDX hit an all-time low of 70.698. On Monday, the USDX fell as low as 73.744. Other currencies have been rising at the dollar’s expense. The euro has gained more than 9 percent this year and hit $1.4639 Monday. Despite the earthquake, tsunami and nuclear disaster in Japan, the yen has gained about 2 percent on the dollar in April. The pound sterling has gained 5.4 percent on the dollar in 2011.

Greenback destined to get weaker

The dollar could get even weaker in the next few months. Analysts expect that the Fed, which convened the Federal Open Market Committee Monday for a closely watched 2-day rate-setting meeting, will maintain a loose monetary policy consisting of interest rates near-zero and quantitative easing, the controversial bond buying program. There is also growing concern in the rest of the world that partisan bickering will preclude the U.S. government from adequately addressing the huge federal budget deficit. Those concerns were made tangible a week ago when the Standard & Poor’s rating agency lowered it’s outlook for U.S. debt. A weak dollar has been padding the profits of U.S. multinationals such as IBM, Coca-Cola and Procter & Gamble, but the spending power of U.S. consumers is being eroded. In a response to a question about how the Fed has hastened the dollar’s decline, Treasury Secretary Timothy F. Geithner told the Council on Foreign Relations in New York the U.S. is committed to a strong dollar and the U.S. won’t weaken its currency to gain an advantage over its trading partners.

The case for a strong dollar

The U.S. Dollar Index is currently only 5 percent higher than its all-time low from March 2008. But also like 2008, oil and gas prices could soon peak because those higher prices are destroying demand, especially in developing markets. If that happens, the dollar could rally as commodity prices fall. Plus, any hint the Fed will raise rates will boost the dollar. Some analysts believe the Fed will start raising interest rates slowly later this year. Today, many currency fund managers are actively shorting the dollar. But if the dollar starts to recover, those funds short the dollar may be forced to cover their positions and the greenback could rally once again.

Sources

MarketWatch

CNNMoney.com

Bloomberg

Wikipedia

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