Recent comments by the US Federal Reserve Chairman, Alan Greenspan, have done little to improve the state of the US dollar. His call to the US government to tackle America’s monstrous budget deficit is a worthy cause, but no one has yet found a logical way of reducing the gap in the US finances without reducing spending.
If they were to consider doing so, the logical place to save money is on defence spending, a very unBush-like policy as anyone who has seen the news in the last four years will tell you. The only other option is to raise taxes, and that will do to votes what a flame-thrower does to snowflakes.
So the US dollar remains weak, although forecasters, who predicted two US dollars to the pound, may not get their way just yet. Institutional traders, driven by the two dollars lure, have sold such vast amounts of dollars that the central banks almost stand alone in holding US dollar stocks.
Significantly, traders with this level of risk tend to become twitchier than a goalkeeper during a penalty shoot out. The slightest hint of good US news results in a wave of dollar buying as traders balance their books to cut risk. This sort of kneejerk reaction is what is keeping the dollar on tenterhooks.
Euro we go…
Conversely, the euro is still strong, buoyed by the current level of US dollar weakness. A euro-dollar rate of 1.30 US dollars plus is expected to remain with us for now, with some analysts anticipating a rise towards 1.40 US dollars. That certainly could happen, but it would need a sturdy push to make the rate swing in this fashion. So what is likely to make that happen?
Certainly, there is little from the European Central Bank to rock the boat. They appear concerned that Eurozone growth has slowed and are expecting inflation to ease to below their two per cent target in the coming year. All of these are factored into the current rates and so none of these projections will strengthen the euro.
The US Federal Reserve is expecting the US interest rate to hover between 1.5 and 3.5 per cent over the next two years and economic growth to remain fairly robust over the same period. The fact that the US economy is finally creating new jobs is a definite boon and more of the same will halt the slide in the dollar, though perhaps not strengthen it greatly.
UnKlear
The UK’s position is just as unclear, with an election in the air spinning policy and a widespread debate over whether UK Chancellor of Exchequer, Gordon Brown, has overestimated growth prospects to skew budget forecasts and curry favour with voters. UK interest rates at 4.75 per cent remain the highest of the industrialised nations, but inflation is remarkably stable and employment levels look favourable.
The consequence is that nothing on the horizon looks ominous enough to rattle traders’ cages sufficiently to move exchange rates significantly. That’s not to say that the markets will stop moving – exchange rates are still ticking away by the second, but it may be that we are in for a period of broad range trading.
This is excellent news for anyone moving monies between currencies. It means that both the buyers and the sellers have an opportunity to trade at attractive levels, as long as they have access to enough information. As Benjamin Disraeli said: “As a general rule, the most successful man in life is the man who has the best information.”
He was probably right. My clients often comment that they have neither the time nor the inclination to watch exchange rates and that a quick phone call when the rate is at its best is all they want from me. If Mr. Disraeli is to be believed that makes all my clients geniuses.
