Tuesday, August 02, 2005

Digital Crystal Ball

Wohoo! Digital Irony's forecast of the dollar going down significantly and soon has come to fruition, 5 days later. Here is a quote from a supscription-only article from the Wall Street Journal. I just want to point out the two reasons I believed the dollar will go down (and the WSJ says this too) 1) public expectations and beliefs, and 2) unsustainablility of various economic deficits [emphasis below added].

Dollar Extends Slide
Despite Strong Data

By STEVEN VAMES
DOW JONES NEWSWIRES
August 2, 2005 10:29 a.m.

The U.S. dollar was lower again Tuesday, continuing its recent decline despite more strong economic data.

In early trading Tuesday, the euro was at $1.2234, up from $1.2186 late Monday. The dollar slipped to 111.31 yen from 112.18 yen, and to 1.2717 Swiss francs from 1.2787 francs. The pound rose to $1.7741 from $1.7684.

The dollar's decline came mostly as traders cut back on dollar-long positions amid renewed worry about foreign central banks diversifying out of dollars, a very slow upward crawl in the Chinese yuan, and external U.S. deficits.

The Russian Central Bank said Monday that it is shifting the euro proportion in its reserves from 30% to 35%, reigniting fears that it and other central banks will be in the market buying euros and selling dollars.

Market watchers said the dollar's sluggish performance in recent sessions had not come from economic news -- in fact, the U.S. reported strong durable goods orders, manufacturing indexes, and second quarter gross domestic product figures last week and on Monday.

Instead, they said, the dollar is "responding to darkening sentiment, not to any news," said analysts at Brown Brothers Harriman in New York. "We think that this reflects positioning issues in a market that is already long dollars, not new fundamentals."

Investors have pared back dollar holdings for other reasons as well. Among them was a Friday report from the International Monetary Fund saying the U.S. current account deficit is unsustainable.

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