Why the dollar has to fall
‘Buy on the rumour, sell on the fact’. In the expectation of higher interest rates the dollar has been firm these last few weeks, culminating in a sharp reversal on the day that interest rates were lifted 0.25%. In spite of recent strength, the major trend which commenced in January 2002 remains weak and looks to be on the verge of moving lower.
Any early signs that US interest rates may reduce, would really kick the legs from under the dollar. The eventual resolution of the global imbalances centred upon the US current account deficit are not likely to be achieved without the dollar falling to much lower levels.
Hank Paulson, the new Secretary of the US Treasury, has made it quite clear that he expects Beijing to move to a market-determined exchange rate. So far, part of the dollar stability can be directly attributed to China’s dollar peg.
We expect the global interest rate differentials that currently exist between, at one extreme, Japan zero percent and, at the other extreme, the US 5.25%, to narrow. Any such development will significantly undermine the dollar.
Our favourite indicator, gold, is unquestionably signalling on-going dollar vulnerability. It is now back above $600/oz about which we are not just a little excited!
For more on gold's bull market, and what it means for paper currencies, click here: Is gold's bull market back on track?
By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.
For more from RHAM, visit http://www.rhasset.co.uk/
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