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Wall Street analysts offer their take on the dollar's recent slide and its impact on equities, and address continuing labor market woes
By BusinessWeek staff
The U.S. dollar fell again Thursday, continuing a recent spell of weakness that has concerned policymakers and investors alike. What did experts have to say about the greenback's decline and other key topics for the economy and markets on Oct. 8? BusinessWeek compiled comments from Wall Street economists and strategists:
Vassili Serebriakov, Wells Fargo BankDownward pressure on the U.S. dollar showed few signs of subsiding [in overseas trading Oct. 8]. Australia's September jobs report surprised on the upside, playing into expectations of further policy tightening by the Reserve Bank of Australia and lifting the Australian dollar to a 14-month high. While the U.S. dollar is slipping broadly, some of the strongest currency performers are found among the growth-sensitive emerging-market currencies including the Indian rupee and the Brazilian real.
The euro also reached a two-week high against the dollar [on Oct. 8]. The European Central Bank left rates steady as expected and subsequent comments from the ECB President Trichet did not hint at any significant changes in the current policy stance. Trichet also made some remarks on the currency markets, saying foreign exchange volatility is "bad for economic stability" and that a strong U.S. dollar is "extremely important."
These comments were nothing new and we doubt that they will be sufficient to reverse the current near-term trend of dollar weakness.
Andrew Tilton, Goldman SachsThe financial crisis and recession have been a disaster for the U.S. labor market. It will take several years to return to normal, mid-single-digit unemployment rates even if the economic and labor market recovery proves to be very strong. Addressing the dire labor market situation will therefore be a central focus of both economists and policymakers for some time.
[The Oct. 7] New York Times suggested that policymakers are contemplating new policies directly aimed at job creation, in particular the possibility of temporary tax incentives to firms that hire new workers. To mitigate the pain of existing unemployment, Congress also is considering a further extension of benefits for the jobless.
We agree that a revival of the labor market will be central to economic recovery, but suspect that further demand-stimulus efforts, along with structural changes that decrease the effective cost of labor (without necessarily reducing wages) will have greater benefits than temporary tax changes.
Sam Stovall, Standard & Poor'sS&P's Investment Policy Committee elected to raise its 12-month price target [on the Standard & Poor's 500-stock index] to 1150 from 1100, and to increase its exposure to global equities. Specifically, we are recommending that investors reduce their cash exposure by five percentage points to a benchmark 10% allocation and add to worldwide equities by raising the U.S. equity exposure to 48% from 45% and the foreign allocation to 17% from 15%.
We see equity prices benefiting from an expected gradual rise in global economic growth projections, a further weakening of the U.S. dollar, and the expectation of a continued improvement in corporate earnings per share. We acknowledge the potential for a pullback of 5% to 10% in the coming months, but we believe it would occur from a higher price level (if at all).