The National Post
Flight from U.S. dollar
By John Shmuel
The U.S. dollar careened lower on foreign exchange markets on Wednesday, catapulting the loonie above the US$1.05 for the first time since November 2007 as renewed confidence in the global recovery sent investors rushing into stocks, commodities and emerging markets.
The road ahead for the world’s reserve currency will likely continue to to be rocky until the U.S. Federal Reserve gives some hint the U.S. economy is robust enough to handle an interest rate hike, analysts said.
“If markets do start to factor in higher interest rates in the U.S., and an end to QE2, that may have some negative implications for risk assets — which would be better for the U.S. dollar,” said Shaun Osborne, chief FX strategist for TD Securities.
Bank of Nova Scotia meanwhile said that the loonie could even retest its record highs around US$1.10 as the greenback continues to struggle.
The DXY index, which tracks the U.S. dollar’s value against six major currencies such as the euro and the yen, hit a 16-month low of 74.44 on Wednesday while investors sought out higher yields. The currency also hit two-year lows against the Brazilian real and Mexican peso. The Swedish krona has been among the biggest gainers this year, chalking up a 9.43% surge while the Mexican peso is up 5.57%.
Strong earnings results from tech giants IBM Corp. and Intel Inc. on Tuesday night helped feed the appetite for stocks, while continuing strength in oil and gold continues to draw investor cash.
The Dow Jones industrial average ended Wednesday up 186.79 points or 1.52% to 12,453.54, its highest level in almost three years and best one-day performance for U.S. stocks in a month. The S&P/TSX composite rose 1.17% to 13,897.48. Strong earnings from Apple Inc. after the bell may only add to the appeal for stocks.
The next hurdle for the U.S. dollar will likely be the debate on raising the debt ceiling, which will play out in the next few weeks in Congress. Treasury Secretary Tim Geithner has said that the U.S. debt ceiling — set at US$14.3-trillion — will be reached no later than May 16. After that date, the government will have a two-month buffer before the U.S. Treasury will be unable to issue more funds.
“The debate that they had over the government shut down got a lot of market attention, but it was really an irrelevant issue — the debt limit debate is more important and the long-term sustainability of the fiscal situation in the U.S. is of supreme importance,” David Watt, senior currency strategist and vice president of RBC Capital Markets, said.
The debate on the debt ceiling also comes on the heels of a downgrade of U.S. long-term debt by credit rating agency Standard & Poor’s from stable to negative, the first time that has happened since 1941. The downgrade means the U.S. has a one in three chance the U.S. could lose its AAA-rating within two years.
Mr. Watt said that downgrade shows investors are increasingly impatient about the approach to debt in the U.S., adding that any delay on tackling the debt ceiling issue will only add to the nervousness around the country’s ballooning fiscal imbalance.
“If they push it to the brink on this situation, there is certainly going to be heightened concerned that they might not deal with the longer term issue either,” he said.
RBC Capital Markets however does not expect the U.S. to be at risk of default, and forecasts that the U.S. dollar will likely bottom out at 95¢ against the Canadian dollar this year, putting the Canadian dollar at about US$1.0526.
Camilla Sutton, chief currency strategist at Scotia Capital, is more bearish on the U.S. dollar, with the loonie expected to test its record high of US$1.10 later this year, before closing out the year at about US$1.05.
Mr. Osborne, chief FX strategist for TD Securities, is a little more bullish on his outlook, forecasting the U.S. dollar will stabilize by the early part of 2012, and even record slight gains against its Canadian counterpart.
“We think it’s more of a range-trade for the Canadian dollar from here and that it’ll be trading around 96¢ (US$1.04) through the second half of the year,” he said.
Financial Post
jshmuel@nationalpost.com
http://business.financialpost.com/2011/04/20/flight-from-u-s-dollar/
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