NEW YORK — There is little doubt that the disappointing June employment report, and the Fed’s recent hike in interest rates, will cause the dollar to decline further against other currencies, especially the euro. Analysts believe a turnaround is possible, however.
This story first appeared in the July 12, 2004 issue of WWD. Subscribe Today.
A Bear Stearns Weekly International Market Strategist report called the weaker-than-expected payroll numbers last month of 112,000 new jobs as “nothing more than a blip,” and blames it on the usual instability in U.S. payroll numbers.
“The encouraging side of the data is the positive underlying trend apparent over the last three months, with the average monthly payroll gain running at 224,000,” analysts said in the report. “This level of job creation vindicates that the U.S. economy is still moving on a strong expansionary track.”
Nonetheless, analysts at Bear Stearns believe that while most of the dollar’s weakness is fading, it’s still trapped in a bear market. The analysts said the Fed’s trade-weighted currency index has a “further 10 to 15 percent [to] fall, on top of the 30 percent that we have seen since the middle of 2001.”
Peter Frank, an analyst at ABN Amro, agrees that payroll data and the Fed’s interest rate hike of 25 basis points is negatively impacting the dollar. But he believes this is only a short-term worry. “There will be a turnaround,” he predicted, “it will just take a while to get there.”
Frank said his biggest concern is a decreased willingness to invest in U.S. currency, and the decline in capital flow.
Morgan Stanley analyst Stephen Jen said in a report that the dollar will reassert itself in 2005. “The hegemonic status of the [dollar] should allow the U.S. to gradually compress its current accounts deficit,” Jen wrote. “A further substantial [dollar] correction is neither necessary nor likely.”
Some analysts, however, are not as optimistic. Carl Steidtmann, chief economist at Deloitte Research, said the dollar will drop due to the sizable U.S. trade deficit. Since there is a large trade surplus abroad, a demand for foreign currency is putting pressure on the dollar, and this offers little hope for a rising U.S. dollar in the future, he said.