Posted by: Ben Steverman on August 11, 2008
Marc Chandler of Brown Brothers Harriman, a currency strategist I respect, sounded very certain Friday that the dollar has hit bottom.
I wrote May 5 an article titled “The Dollar: A Bottom at Last?” In the months since, I’ve been glad we had the ‘question mark’ on the end. It’s taken a little while for the world to realize that the euro at $1.60 is just too expensive to make sense.
Selections from Chandler’s writing on Aug. 8:
The dollar’s multi-year bear market is over and given the trending nature of the currency market, a new bull market has begun. […] This is the watershed week for the US dollar. The magnitude of the dollar’s moves and the breaking of key technical levels suggest that a major shift in the outlook toward the dollar is occurring as massive positions are adjusted. […]
By many measures of valuation, the US dollar has rarely, if ever, been as cheap as it has become recently. […]
Just like we can look back with awe and wonderment at the ridiculous heights some technology shares reached in the late 1990s and early 2000, we are going to look back with a similar bemusement at the pound trading about $2.10 and the euro above $1.60 and the Australian dollar near parity with the US dollar.
If Chandler’s right, what does this mean? A few implications:
1. International investments aren’t going to be as attractive to U.S. investors going forward, because they won’t get the same currency benefits — at least from unhedged funds.
2. U.S. companies that saw big profits from overseas could be hurt. A global slowdown (which is one reason the dollar has strengthened against other currencies) might take its toll. And, even if the dollar stays relatively cheap for a while, quarterly profit reports won’t record the same year-over-year currency benefits.
3. U.S. exporters, especially manufacturers, have profited off the cheap dollar. If it stays relatively cheap on a fundamental basis for a while, U.S. firms might still have a substantial advantage when fighting for global business.
4. More or less foreign buyouts? Do prospective foreign buyers of U.S. assets decide this is the time to act, before the dollar strengthens even more? At what point does a stronger dollar (and we’re still a long way from ‘strong’ by any definition) scare away foreign buyers — like Belgian brewer InBev buying up Anheuser-Busch (BUD).
5. Fewer worries about inflation. As Ed Yardeni writes today: “The stronger dollar and weaker commodity prices should push headline inflation back down around the world, especially in the United States. Core inflation could also moderate.”