Dollar Rebound ?

Is the Dollar’s recent strength a reflecton of improving conditions in the US — or Europe’s ongoing malaise?

Thats the question the front page of the WSJ asks this morning.  It also provides the excuse I needed to introduce curency as a new category.

Chart: Currency’s gains reflect better outlook for U.S., weaker one for Europe:

WSJ:  "After a long stint as the 98-pound weakling of major currencies, the dollar has put on some muscle in recent months, forcing currency traders to revamp their outlooks and giving a break to Americans traveling abroad.

The U.S. currency jumped Friday to its highest level against the euro in nearly seven months . . . The euro has fallen about 7% this year against the dollar.

The U.S. Dollar Index against major currencies last Friday posted its first weekly close above its 55-week moving average since April 2002. That’s a key resistance level, a kind of psychological barrier that helps define which way the market is moving. Breaking through it could persuade many currency traders that the dollar will continue higher. Commodity prices, which tend to move in the inverse direction of the dollar, also slumped last week."

Note that the technicals of the nearby chart: higher lows, and (mostly) higher highs. That’s the textbook definition of an uptrend. So where is this strength coming from?

"Some strategists and currency managers attribute the dollar’s newfound strength in part to encouraging U.S. economic data and worsening economic and political reports from Europe. They also cite a pause in the speculation that China is about to revalue its currency. Such speculation has been a source of downward pressure on the dollar.

Long-term structural issues, such as the trade deficit, still bedevil the U.S. currency. But a stronger dollar has an upside for the economy. It could ease concerns about U.S. inflation by reducing the cost of imports. A stronger currency also makes U.S. stocks and bonds more attractive to international investors."

That certainly sounds pretty good; The bigger question is whether this is merely a short-term, counter-trend rally within a longer bear market for the greenback? Its a realistic possibility that this is merely an oversold bounce of sorts.

The given explanation has an element of complacency in it:

"The dollar’s unanticipated resilience suggests that global investors may be taking a more benign view of the U.S. economy and its structural imbalances than they did a few months ago. U.S. consumers’ appetite for imported goods and the weak performance of American exports has sustained a huge trade deficit, but a recent narrowing of the gap has eased fears, at least temporarily, that ballooning deficits could spark a crisis. Fresh signs of jobs growth and strong retail sales have made concerns about an economic slowdown look slightly overblown."

You know my thoughts on the recent NFP report, as well as GDP.

This is an extremely important subject for markets going forward. Be sure to read the full article.

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Source:
Dollar Rebound Builds On Stronger Economic Data
Craig Karmin
The Wall Street Journal
May 16, 2005; Page A1
http://online.wsj.com/article/0,,SB111620574798834235,00.html

see also
China’s Wen: Won’t yield on yuan
Reuters, May 16, 2005: 7:26 AM EDT
http://money.cnn.com/2005/05/16/news/international/china_yuan.reut/