Here’s the wildcard that could boost the dollar the rest of the year
US Dollar
The mighty dollar continues to soar despite
Hurricane Rita blowing closer and closer to the coastal parts of Texas as well
as weaker economic data. The only explanations for the latest bout of strength
still lies in the age old argument of increasing carry for the dollar and tax
incentives for US companies to repatriate overseas earnings as a part of the
Homeland Investment Act. The Act provided a one-time tax break for US
corporations by applying a 5.25% effective tax rate on repatriated dividends
instead of the usual 35%. Companies had the option to either apply the tax break
to their 2004 fiscal year earnings or their 2005 fiscal earnings. This means
that repatriation back into the US could still be a big wildcard for the
remainder of the year.
As for carry, it was only 2 days ago that the Fed
injected some optimism into the markets by being more hawkish than most traders
had anticipated. With at least one more rate hike in the pipeline, carry traders
still have interest in the US dollar. Yet, this does not mean that the US
economy is performing all that better. Today, we saw jobless claims reach 432 K.
Euro
The Euro fell over 130 pips today against the
dollar, erasing most of yesterday’s gains. These days it seems to really be a
matter of who is facing a more dire fate — the US or Europe. First Germany was
plunged into a political crisis when there was no clear winner following the
German elections this past weekend. Now, Italy faces its own crisis following
the surprising resignation of Domenico Siniscalo, Italy’s finance minister. Even
though Italy the was worst performing major economy within the Eurozone this
year, Siniscalo’s determination to tackle Italy’s economic problems provided a
glimmer of hope. He also stood strong against Antonio Fazio, the Bank of Italy
Governor who attempted to impede the free movement of capital. Siniscalo
resigned in protest to the government’s failure to penalize the central bank
governor following a banking scandal. However it doesn’t end there — the
situation got even more uncertain when Italian Prime Minister Berlusconi
requested for the resignation of Antonio Fazio. There is no word yet from Fazio,
who is on route to Washington to attend the G7 meeting this weekend.
British Pound
The British pound was the biggest loser today,
falling 270 pips before settling 235 pips off of the high. The currency pair
slid easily below the psychologically important 1.80 level, which not only
erased yesterday’s gains, but also plunged the currency pair down to the lowest
level since the beginning of the month. Even though the CBI manufacturing orders
index improved from —29 to —27 for the month of August, the IMF cut its growth
forecasts for the UK from 2.6% for both 2005 and 2006 to 1.9% and 2.2%
respectively. The agency is worried that high oil prices, a slowing housing
market and still lofty interest rates could take a big toll on growth. The IMF
also warned that the government’s tax revenues may be too optimistic and that
they should probably curb spending growth. Aside from fears of slowing growth,
rumors of mergers and acquisitions activity also pressured the pound. There is
talk that British Petroleum may have an interest in bidding for Spain’s Repsol.
Japanese Yen
A smaller trade surplus for the month of August
as well as broad dollar strength has sent the USDJPY currency pair higher once
again. The trade surplus shrank 80% in August as higher oil prices outweighed
export growth. Even though Japan has become much more energy efficient and along
the same lines more resilient to higher energy prices, the latest trade data
indicates that the economy has not been completely immune to the rise in oil.
Although the yen strengthened throughout the month of August and into the first
week of September, economic officials have continued to warn about the negative
implications that it has for the economy. Although the impact has been felt, it
should be limited. Meanwhile shifting over to politics, Koizumi’s strong win has
given him a solid platform to push forward on privatizing the financial system,
starting off with restructuring or in some cases even elimination of eight state
owned banks. This should be really positive for the private banks who are
frequently undercut by the government owned banks. Meanwhile, in revaluation
news, Zheng Xinli, China’s Deputy Minister for central policy research was
caught saying that investments in US Treasuries is “not worthwhile†on a
long-term basis. He also hinted said that equity investments, particularly that
of overseas energy resource companies would be a much better investment. Over
the medium term, China’s decreasing appetite for US Treasuries should be
negative for the dollar.
Kathy Lien
Kathy Lien is the Chief Currency Strategist at
Forex Capital Markets. Kathy is responsible for providing research and analysis
for DailyFX, including technical and fundamental research reports, market
commentaries and trading strategies. A seasoned FX analyst and trader, prior to
joining FXCM, Kathy was an Associate at JPMorgan Chase where she worked in Cross
Markets and Foreign Exchange Trading. Kathy has vast experience within the
interbank market using both technical and fundamental analysis to trade FX spot
and options. She also has experience trading a number of products outside of FX,
including interest rate derivatives, bonds, equities, and futures. She has a
Bachelors degree in Finance from New York University. Kathy has written for
Stocks and Commodities, CBS Market Watch, ActiveTrader, Futures and SFO
Magazine. She is frequently quoted on Bloomberg and Reuters and has taught
seminars across the country. She has also hosted trader chats on EliteTrader,
eSignal, and FXStreet, sharing her expertise in both technical and fundamental
analysis.