Dollar falls as speculators readjust positions

By Steve Johnson
Published: April 11 2005 11:34 | Last updated: April 11 2005 11:34

The US dollar extended its late Friday slide in European trade on Monday as technical factors held sway and the market eyed Tuesday's US trade data.

Data released late on Friday from the US Commodity Futures Trading Commission indicated that as of April 5, net short positions in the dollar had fallen to their lowest level since February 8, when the dollar's early-year rally hit a brick wall. Indeed, speculators had actually built up sizeable long dollar positions against both the yen and the Swiss franc.

The data suggested the dollar's four-week rally, which many believe was powered by the liquidation of short-dollar positions, may now run out of fuel.

"Unless there has been a significant reversal of the dollar-negative sentiment that has persisted the past few years, the recent dollar rally has likely run its course, especially against the Swiss franc and yen," said TJ Marta, senior currency strategist at RBC Capital Markets.

With Tuesday's US trade data likely to re-focus the market away from the dollar-positive cyclical story and on to the structural woes of the US, Jim O'Neill, head of global economic research at Goldman Sachs, said: "We find it exceptionally difficult to become even modest dollar bulls, and indeed, when dynamic market participants apparently switch to being dollar bulls, it immediately makes it attractive to try to short the dollar once more, as the non-cyclical fundamentals are so poor, and possibly deteriorating."

Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi, added that the data suggest: "that there is a large number of dollar bears waiting on the sidelines to re-enter the market."

This appeared to be the case on Monday, with the dollar falling 0.4c to $1.2956 against the euro, Y0.4 to Y107.96 against the yen, 0.6c to $1.8886 versus sterling, 0.2c to C$1.2274 against the Canadian dollar and 0.4 centimes to SFr1.1944 against the Swiss franc.

Hans Redeker, global head of forex strategy at BNP Paribas, saw signs of central bank diversification behind the dollar's wobble. "Official and semi-official accounts lifted euro/dollar from $1.28 suggesting that re-allocation of reserves remains an issue. Central Banks seem to use periods of relative dollar strength to reduce their holdings of dollars."

Apart from appreciating against the greenback, other major currencies were little changed. Sterling derived little support from solid UK data, with the UK's trade deficit narrowing to a smaller-than-expected $4.8bn in February and producer price inflation hitting 1.8 per cent month-on-month in March, indicating continuing pressure from rising commodity prices, although weak output prices indicate producers are struggling to pass these costs on.

Sterling was flat at S0.6858 to the euro and a fraction softer at Y203.91 against the yen.

The yen pushed marginally higher as Japan's current account surplus rose 10 per cent to Y1,661bn in February, although the impressive headline reading masked a smaller trade surplus, with exports falling 4.2 per cent. The yen firmed modestly to Y139.91 against the euro.

Well first, nothing every happens right away in these primary markets. Not sure what Always Right means by "short term" and "longer term".

But look, the fed cannot afford to have the dollar restablish a slide here--if that happens, they lose control over gold, silver, both the long and short federal debt markets, and almost certainly the stock market. And the fed still has lots of bullets on this issue.

Now if Always means tomorrow or Wednesday by "short term"--well the dollar could well slide some more for the next couple of days but over the next month or two, the fed is still supporting a rally in the dollar and if it fails to happen, there are a number of adverse consequences.

Longer term (more than 90-120 days), the economy that supports the dollar (the ability of the American taxpayer to pay taxes to support the federal government's ability to pay increasingly higher interest rates on federal debt) is contracting. So that is a factor that is negative for the dollar.

Against the Euro? Well the Euro economy is probably in worse shape than the North American economy. So even if the fed is not able to provide much effective support for the dollar, it is not likely to go down a lot more against the Euro.

At present, if the Chinese float their currency, it will rise sharply against the dollar. But, China also has a problem--their economy is sound only because of the US Consumer; if Americans stop buying, the Chinese economy has a problem also and in turn, so does their currency. And almost certainly, if everything made in China doubles in price overnight, Wal Mart has an immediate problem; but China has a much bigger longer term issue.

Versions of these two (Euro; China) sceaneros are applicable to the offshore currencies generally. The energy producers (Middle East); and maybe Canada; have some attractions long term but neither are large enough to be a real alternative to the dollar.

So where does the dollar bear go? Maybe he buys gold; but if the US domestic economy has a significant contraction, the dollar is worth more as legal tender to pay debts. Difficult to convert dollars directly into energy assets.

So for those who are longer term dollar bears (I am one), it is real easy to see why the dollar is a poor excuse for a money system as either a store of value or as a medium of exchange. But on the other hand, it is difficult to see the course of events that converts clear underlying structural weakness in the US monetary system directly into a collapse of the dollar.

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