Dollar's demise may have been greatly exaggerated
NEW YORK (Reuters) - As the first quarter of 2007 draws to a close, the U.S. dollar's demise, predicted for most of 2006, appears to be greatly exaggerated.
After a bounce this quarter from 20 month lows seen at the end of 2006, the dollar is only marginally lower than three months ago.
Slow but resilient U.S. economic growth, helped by a mild northern hemisphere winter, in the absence of an expected Federal Reserve interest rate cut during the quarter, helped spur a rally in the greenback mostly in January.
Concerns about falling U.S. house prices and defaults in the subprime mortgage sector contributed to some U.S. dollar weakness in February and March, but few analysts are calling for the dollar to be shorted aggressively in the months ahead.
"A lot of people, myself included, were caught by surprise by the dollar's strength at the start of the quarter," said Chris Melendez, president of Tempest Asset Management, a currency hedge fund, in Newport Beach, California.
"Much of its resilience came from some good economic reports and from the fact that rate cut expectations kept being pushed further away."
Melendez said that despite of his long-standing bearish view on the dollar, he considered reversing his call to short the dollar after it rallied to $1.2866 against the euro on January 12. And he is now prepared to do it again if the dollar rebounds to $1.3080 per euro. On the downside, Melendez doesn't expect the dollar to weaken below $1.35 per euro.
As of March 29, the dollar was about 1.0 percent lower versus the euro in the quarter, with the European currency trading at around $1.3330 EUR=. Against the yen, the dollar slid 1 percent in the same period to trade at 117.87 yen JPY=. It weakened about 0.1 percent against the Swiss franc CHF= and 0.5 percent versus Canadian dollar CAD=. And it was 0.15 percent lower versus sterling GBP=.
"That's far from a big plunge," said Daniel Katzive, a currency strategist for UBS AG, in Stamford, Connecticut. "Coming into the year, most people were betting on a more aggressive Fed and on a bigger fallout in the housing markets that didn't happen."
"AMBIVALENT" FED
Back in December, UBS analysts had a 3-month forecast for euro/dollar at $1.33, in line with the pairs' present level. At the start of that month, U.S. short-term interest rate futures priced chances of a Federal Reserve cut by March above 50 percent. Futures now price about a 30 percent chance for the Fed to cut rates from the present 5.25 percent by the end of June.
"At a certain point during the quarter our forecast didn't look sustainable," said Katzive, who is maintaining the same $1.33 target for euro/dollar for the next thee months.
"Looking forward, the dollar is probably going to keep struggling in particular against the euro," he said. "But because it's getting more difficult to predict what the Fed is going to do, I expect to see it trading on the sidelines for quite some time."
If anything, Fed Chairman Ben Bernanke's Congressional testimony on Wednesday made the outlook for the U.S. dollar even murkier. Bernanke told the Joint Economic Committee the U.S. central bank has not moved away from its bias toward battling inflation, but warned that risks to the economy's health have also risen. For details, see ID:nN28297416
The dollar briefly extended losses right after his remarks, just to reverse course later and rally against the euro. Continued...
