Stomach-churning dips haven't been confined to the stock markets. Currency markets, too, have been giving investors a hair-raising ride. First the dollar went into a nosedive against the euro -- plunging 18% from mid-January to mid-July. Now, the greenback has suddenly come back, rising about 4%, to 97.4 cents to the euro on Aug. 7.
Why the turnabout? The dollar, analysts say, is benefiting from a number of short-term effects. Once those fade, say some traders, watch out. "We think the dollar downtrend is still in place," says Stephen Hull, currency strategist at Goldman, Sachs & Co. in London.
Like equities, the dollar was hit hard by the outlook for weaker U.S. growth and the U.S. corporate scandals. Now the currency markets, like stocks, are pausing after a huge move. Speculators are taking profits and covering their short positions.
Japanese intervention has also boosted the greenback, sending it from around 116 yen to about 121 over a two-week period. At the same time, U.S. investors, worried about everything from possible war with Iraq to global growth prospects, are bringing money home, leading to big dollar purchases. And hope has surged that Federal Reserve Chairman Alan Greenspan will cut rates on Aug. 14, giving a boost to U.S. equities and the economy. "Investors think the cavalry is coming to save the day," says Rebecca Patterson, currency strategist at J.P. Morgan Chase & Co. in London. A Fed-led recovery would provide little reason to bet on the yen or euro.
How long will the dollar's strength last? Some traders are betting it will surge to 93 cents to the euro. Others are skeptical. Goldman Sachs, for instance, forecasts that record trade deficits will drive the dollar down again, to $1.08 to the euro, within six months. This wild ride isn't over. By Stanley Reed in London