The US dollar has reached fair value against the euro, according to Ken Forman, global investment st...
The US dollar has reached fair value against the euro, according to Ken Forman, global investment strategist at Standard Life Investments.
As of 9 July, the euro was at 1.13 to the dollar.
Forman says the group's technical analysis of investor sentiment, volume and volatility suggests the currency is now approaching a period of range trading.
However, looking beyond the short term, he believes underlying conditions suggest the dollar will continue to decline until it is clear to global investors that policymakers have been successful in their efforts to reflate the US economy.
The euro has been steadily gaining ground since October 2000 when it hit its lowest point against the dollar. According to Forman there are two main reasons why investor's perceptions have shifted with regard to the two currencies.
Firstly he says the policies of the Federal Reserve and the European Central Bank (ECB) have diverged sharply. The Fed has pledged to do all in its power to ward off the threat of deflation by indicating it will keep interest rates low for the foreseeable future.
The ECB has been more rigid in its approach, emphasising the need to keep a lid on current inflation while ignoring the threat of future deflation and recession.
He says: 'This has created an attractive yield differential for investors and has precipitated strong demand for the euro over the dollar.'
The second factor behind the rise of the euro, he adds, is that while this shift has been occurring and the dollar has been falling, there has been a change of tone among US policymakers, acknowledging a weaker dollar is supportive to American exporters.
While Tom Elliott, strategist at JP Morgan Fleming, agrees there will be some longer-term weakness in the US dollar, in the short term he expects it to strengthen slightly. As a result, he has reduced his underweight stance in the currency.
Elliott says one of the major problems facing investors who want to short the dollar is the limited choice of where to invest instead, with only the euro looking attractive.
The euro benefits from the interest rate differential from the US dollar, which Elliott says is attractive for savers.
The main problem for the dollar, argues Elliott, is the US current account deficit. Still, he adds, it is being propped up by Asian central banks that do not want the dollar to fall because they want to protect their own export markets.
Forman says the key issue to understand about the depreciation of the dollar is that it will force other countries to respond, or face the consequences of an appreciation of their currencies.
For example the Bank of Japan has repeatedly intervened in the currency market to protect the yen from strengthening through ¥116, which Forman says is a critical level for the profits of Japanese exporters.
Similarly authorities across Asia have reacted quickly by easing monetary and fiscal policy, moves Forman says have been generally successful in limiting the impact on their economies' competitiveness.
Dollar has reached fair value against the euro.
Dollar to strengthen in the short term.
Authorities reacted quickly to weak dollar.
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