- LONDON (Reuters) -- Hedge
funds may have triggered it, but the dollar's sharp slide over the past
few weeks is more than just speculation -- it is a reflection of mainstream
investors scrambling to dump the currency.
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- Whether the sell-off is warranted remains a matter of
contention. But at least for now, momentum is propelling the dollar to
record lows against the euro and unnerving some investors and companies
who had bet differently.
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- "At the moment, the market has got the bit between
its teeth," said Paul Duncombe, head of currency management at State
Street Global Advisors. "(The dollar) can certainly go a lot further."
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- The dollar was testing $1.30 to the euro on Monday, having
fallen in value from around $1.24 in mid-October when currency strategists
said it broke definitively out of a 7-1/2 month trading range.
-
- Given that a Reuters poll in mid-September showed leading
investors expecting an end-year rate of around $1.20, the fall must have
caught many by surprise.
-
- Strategists said that the original mid-October break
came courtesy of hedge funds who were testing the levels. After that, others
-- medium-term investors, Middle East accounts and some corporates -- got
into the act, buying euros before the price rose too high.
-
- Increasingly, the pressure is also on those European
companies which have not yet moved to protect their dollar-based earnings
from the currency's downturn.
-
- Thanos Papasavvas, currency strategist at Credit Suisse
Asset Management, said his fund firm shorted the dollar when it broke out
of the range at $1.2450 in mid-October.
-
- "We hear that European corporates have not been
doing that, so they have been caught on the wrong foot," he said.
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- THE BUCK STOPS WHERE? One gauge of how strong the current
momentum is came on Friday after the U.S. Labor Department reported that
non-farm payrolls rose twice as much as economists had expected.
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- Implying strength in the U.S. economy and further scope
for interest rate increases from the U.S. Federal Reserve, the surprise
data should have lifted the dollar. In the event, it did so only briefly
before the decline resumed and the euro hit an all-time high.
-
- "I think this is a pretty good guide (to) just how
entrenched negative sentiment is toward the dollar," Richard Franulovich,
senior currency strategist with Westpac Banking Corp, said at the time.
-
- A second gauge came on Monday when European Central Bank
President Jean-Claude Trichet said that recent moves were "unwelcome"
-- the kind of comment that in the past has bolstered the dollar. The dollar
did firm, but only briefly and the move was muted.
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- So where does the dollar go from here?
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- As for much of the year, the answer depends on what side
of the great dollar divide you are on -- whether the large and growing
U.S. current account deficit spells continuing weakness, or whether the
U.S. economic landscape means dollar strength.
-
- Mark Farrington, head of currency at Principal Global
Investors, belongs to the latter camp.
-
- He said the dollar is driven primarily by interest rate
expectations and Friday's jobs data gave scope for the Fed to tighten more
than earlier softness had implied -- a factor that will eventually lift
the dollar.
-
- "We are nowhere near the end with the Fed,"
he said, describing the current dollar sell-off as "a classic deviation
from fundamentals driven by emotions."
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- PERHAPS NOT HERE
-
- Ranged against that view are those who see little to
stop the dollar from falling to offset the current account deficit.
-
- The re-elected administration of President Bush, it is
argued on the one hand, will allow the dollar to decline, boosting U.S.
exporters.
-
- "Bush's non-interventionist or laissez-faire ethos
means there will be no standing in the way of a dollar in need of further
depreciation against all currencies," Mike Lenhoff, chief strategist
at wealth manager Brewin Dophin Securities, wrote last week.
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- Trichet's ECB, meanwhile, is seen as benefiting from
a higher euro as it eases inflationary pressures, particularly energy prices.
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- Its biggest fear is that the dollar decline will be faster
than it has been to date.
-
- Sentiment -- as judged by market moves -- clearly appears
to be leaning heavily to the weak dollar side at the moment.
-
- It could be driven even further if Europe's corporates
truly have not hedged enough and are still long on dollars.
-
- Credit Suisse's Papasavvas said both corporates and investment
houses would take any slight strengthening of the dollar as an opportunity
to sell. "We would expect some correction to take place, but not by
more than a point or two, before fresh selling comes back in," he
said.
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