Monday, November 17, 2008

The Dollar

There has been alot of discussion in my office of late as to which way the Dollar is headed. I can see why there is such confusion, as it was in a big tail spin for years as the Bush administration silently encouraged the weak dollar. Now with the world in financial turmoil it seems that everyone is running to a "Safe Haven", even if the safe haven is being blamed for the problem. My thoughts are that the dollar is going to benefit over the medium term(3-6mths). Right now there is little conviction as to when the bottom will be in and a leveling out process will begin. I am looking for the 1.2700 level to get short Euro's. I think the near term trend is lower and a recession has officially hit Europe. I see them as being much more bureaucratic then the U.S. and as such it will take longer to get their house in order. Europe traditionally has had high rates to deflect inflation and I think that this fear of inflation will prevent rates from coming down quick enough and stay down long enough to get them out of this mess quickly. Remember over the summer as the crisis was getting its legs under it the ECB hiked rates and increased both capital and margin requirements. The 2 year bund remains 100 bp below the ECB target rate which suggests to me that alot more cutting should be done. This cutting I think happens later then sooner.

In the longer term 6-18months I think that the Dollar will suffer. A weak dollar makes our goods more competitive on the open market. Although it is also more inflationary, I think it is a "small" price to pay to help get our economy going. I also think that we have a huge amount of new debt to be issued. A weaker dollar helps as we get to repay that debt with less dollars. I think the incoming administration will talk "Strong Dollar" as most have in the past, but will be quite happy to see it weaken in the coming years.

I am looking for the Euro to test sub 1.2000 and then rebound sometime in the middle of next year to all time new highs. Then again I am sure I will change my mind about 200 times before the end of the first quarter!

Do look for Latin American interest rates to move lower in a big way. Led by Mexico and Chile. Brazil will lag for off-shore market participants as the on/off shore market will remain bid until the first quarter of next year.

Good Luck and Good Currency Trading.

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