Wednesday, December 29, 2004

Now people are talking downright crazy about the plunging dollar/skyrocketing euro.
David Gilmore, analyst at FXA, saw a �very good chance� of the dollar sliding to $1.45-1.50 against the euro by the time of February�s G7 meeting in London, with $1.60 a possibility before the dollar begins any sustained recovery.

With concern mounting over the twin fiscal and external deficits of the US, Mr Gilmore saw a �growing consensus that the dollar downtrend has months more to play out�.

Clifford Bennett, chief strategist at FxMax, was even more bearish, seeing a �real risk of a blowout� in the US current account deficit in the first half of 2005 as the falling dollar forces US consumers to spend even more on imports to maintain the same standard of living. This could send the dollar plunging to $2 to the euro, he believed.

�The nightmare scenario is a falling US dollar starting a spiral of loss of investor confidence, generating an even lower dollar, which generates a further loss of investor confidence,� he said.

�In such a scenario the euro could hit $2 in 12-18 months and even the united effort of central banks including the Fed would have trouble controlling it. The fall out of investor panic flowing over to other markets could also be severe.
Man, you couldn't even get a pessimist and doom-sayer like me to go for $1.60, much less $2.00. The languid European Central Bank would be thrown in action long before that, and I have to believe the Bank of Japan would throw it's full weight into the fray. In the first eleven months of 2004 Japan exported nearly as much to the eurozone (�6.5 trillion) as to China (�7.2 trillion), and exports more to the eurozone plus the UK (�8.0 trillion) than to China.

Many comments in the media suggest no concerted action will be taken before the February G7 meeting. While I am sure that is true as far as looking to formal US participation in a coordinated currency management scheme, I can't see the EU and the Japanese sitting on their hands watching the euro ratchet up past $1.40.

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