Dollar

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As you all know, I recently published an article that talked about the state of the U.S. economy and that it may be in the “beginning’ stage of an economic recovery.

I talked about the valuable indicator of copper and why it leads the way and tells you that the economy will recover long before the “nightly news” or even analysts tell you.

Today, another site that I highly regard, also talked about the importance of copper in leading the way to an economic recovery. Daily Wealth gave this checklist for an economic recovery.

TheTrue WealthScript for Economic Recovery

• Investment-grade corporate bonds rally first,
• then stocks rally. Around the same time,
• the price of copper recovers.

On the basis of technical factors, the Australian Dollar had halted its precipitous decline against most major currencies. As a result of an unbelievable 100 basis point interest rate cut, however, the currency has resumed its fall. That the rally was short-lived is not a mystery. The yield advantage enjoyed by Australia over the last few years has almost completely evaporated. Combined with lackluster Australian equity performance and tanking commodity prices, foreign investors have little reason to maintain capital in Australian holdings. On the plus side, the rate cut showed investors how serious Australian economic policy-makers are in dealing with the credit crisis. Unfortunately, diligence doesn't always translate into efficacy.

At this point, it should be clear to everyone that the ongoing Dollar Rally is due more to technical factors than US economic strength. In short, the Greenback is benefiting from the intertwined trends of risk aversion, capital flight from emerging markets, unwinding of carry trade positions, and the perception that the US is a safe haven to invest during periods of global economic uncertainty.

The consensus among economists is now that the US Federal Reserve Bank will lower its benchmark interest rate all the way to 0%. The Fed Funds Rate currently stands at 1%, and two projected 50 basis point cuts within the next two months would bring the rate to its lowest level ever, where it could remain for as long as one year. Apparently, the concern among economic policymakers is that the sagging economy and falling asset prices will ignite a protracted period of deflation. Given the extent to which the Federal Reserve Bank as well as the Federal Government have already moved to stimulate the economy, it's unclear whether any further loosening will have an effect.

The Australian Dollar has lost nearly 1/3 of its value (relative to the USD) over the last few months, as the credit crisis continues to drive investors away from areas perceived as risky. In other words, the best (and perhaps the only reasonable) explanation for its fall has very little to do with Australian economic fundamentals. Then again, the rise in the currency that took place over the last decade was also rooted in technical and financial trends, although rising commodity prices were also a factor. The Australian Dollar (as well as the New Zealand Kiwi) was one of the prime beneficiaries of carry-trades, due to unusually "generous" interest rate levels.

Kurt Brouwer offers his take on the falling USD over at Fundmastery Blog:

Let’s start with how far the dollar has fallen. One problem with our
media is that the news of the day is often one-sided and it seldom
comes with any historical perspective. For example, do you remember
hearing that the Euro fell to historic lows versus the dollar? Well, as
you will see from the chart below, it happened not too long ago. In
fact, the Euro fell steadily versus the dollar for the first five years
of its existence, beginning in January 1999. It did not get back to
even until mid-November, 2003. At the low point for the Euro you could
have bought one for 84 cents. Now, it takes a $1.56.