Magazine article Global Finance

THE AMERICAS: Dollar Regains Composure, but Little Has Changed

Magazine article Global Finance

THE AMERICAS: Dollar Regains Composure, but Little Has Changed

Article excerpt

The US dollar rebounded sharply in early March, recording its biggest jump in a year against the euro on expectations of an imminent rate cut by the European Central Bank.

When the ECB held its ground, the dollar bulls pinned their hopes on confirmation that the US labor market was set to improve in the near term, following a multi-year slump in manufacturing jobs.The February payroll report threw cold water on this thesis as well.

The dollar's bounce was overdue, given the extreme negativity and one-sided positions in the market after two years of relatively steady declines on worries about the US current-account deficit, analysts say.

What was missing, however, was any significant change in fundamental economic news.

"Turning around a two-year-plus trend in the dollar will require more than a bout of risk aversion," says David Gilmore, partner and economist at Essex, Connecticut-based Foreign Exchange Analytics.

It also will take more than a quarter-point rate increase this year by the Federal Reserve for the dollar to turn the corner, he adds.

The weak-dollar story is built on the need to address the record current-account deficit through dollar depreciation because other channels for adjustment are severely constrained, Gilmore says. Policies support low US savings and high foreign savings, for example.

"Meanwhile, the need to grow jobs will keep the Bush administration very patient in any future orderly dollar declines," Gilmore says.

But then, what do the analysts know? …

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