Worst over, dollar on recovery path

Worst over, dollar on recovery path
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First Published: Sun, Aug 10 2008. 11 43 PM IST

Updated: Sun, Aug 10 2008. 11 43 PM IST
After six years of almost straight decline, the US dollar is stirring. The greenback is making a vigorous beginning to what may prove a jittery recovery, having risen abruptly to five-month highs of around $1.50 against the euro, recovering from its low of over $1.60 a month ago, and to 17-month highs against the pound of about $1.92. Against the yen, the dollar rose to 110 yen, its highest this year. It is probably over the worst, for now.
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Talk and numbers have helped to bring about the dollar’s turn. The words came from Ben Bernanke. In June, the chairman of the US Federal Reserve made it clear that he didn’t like the results of a popular dollar-oil speculation—selling the currency and buying the commodity. Central bankers rarely comment on exchange rates, but on this occasion it proved wise.
The market decided that Bernanke, unhappy about the inflationary effects of a free-falling dollar and skyrocketing oil, would raise interest rates as soon as possible. Wobbling banks have so far stayed his hand, but the market’s expectation of higher US rates is likely to be fulfilled—unless the economy takes a turn for the worse.
In Europe, the worse turn has already been made. The overnight interest rate has gone up to 4.25%, but a recession, or something like it, is likely to prevent a further increase, as Jean-Claude Trichet, the European Central Bank president, made clear on Thursday. It’s a similar story in Japan. Only the dollar has the support of probable interest rate increases.
There is a paradox here. The weak dollar has helped the crisis-stricken US avoid a recession as yet. While houses, construction and banks have tumbled on US consumers, soaring exports have prevented growth from diving and unemployment from spiralling. US import volumes have fallen for the past three quarters as foreign goods were priced out of US markets.
The life-support of the weak dollar remains needed by the US economy, while the euro zone could do without an export-killing $1.60 euro.
Fortunately, that airless peak is receding fast. The dollar is rallying but will have to travel a long way before it ceases to be highly competitive. The ups and downs on that journey will depend on how well the US economy heals and how badly the rest of the world wanes.
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First Published: Sun, Aug 10 2008. 11 43 PM IST
More Topics: Market | Dollar | Bernanke | Inflation | Euro |