Dollar At Critical Level
Neil Behrmann
London - The outlook of the dollar has become critical for the global
economy and the performance of gold, silver and platinum. The threat of
overshooting on the downside is apparent. The saving grace for the dollar is
the relative strength of the US economy and prospect of higher interest
rates and large scale bearishness of market participants i.e. at some point
they'll have to cover their shorts.
Since its peak at the beginning of 2002, the US dollar index, which is the
weighted average of yen, euro, sterling and other global currencies, has
devalued by a whopping 25 per cent. Unsurprisingly gold has surged during
this period, largely reflecting the downturn of the currency. The dollar
index is currently flirting with a critical support level of 92 points and
if it breaks down from this level, it could "overshoot" to 1995 levels of
around 80 points. This would be a massive excessive depreciation of 35 per
cent from the 2002 top.
The latest fund manager survey of Merrill Lynch indicates that investors
have cut their exposure the dollar considerably. Its October poll of fund
managers in the US, Europe, Asia and elsewhere finds that 49 per cent of
respondents contend that the dollar is overvalued, up from 43 percent in
July. Only 18 per cent say that it is undervalued. Net dollar exposure
of 31 per cent is the lowest since 1989. This compares with net exposure of
almost 70 per cent in the late nineties when America was booming. Although
the US economy is growing again, the market is ignoring its relative
strength. Only 26 per cent of fund managers say that the yen is over valued,
while 37 per cent say that it is undervalued. A net 11 percent thus contend
that the yen is cheap, even though a rising currency could drive the economy
downwards again. Fund exposure to the yen is the highest since the early
nineties and the currency is at a seven year peak against the greenback.
The Japanese stock market, helped by a surge of foreign buying, is near the
top end of its three year trading range.
Exposure to the euro is below the 70 per cent peak seen a few months back,
according to Merrill, but is still over 60 percent. This compares with 55
per cent in 2001. Thirty per cent say that the euro is over valued and 19
percent undervalued. Thus a mere net 11 per cent contend that it is
overvalued.
Fund managers' exposure to Australian and Canadian dollars is the highest in
almost 15 years, according to Merrill's historic data. The survey didn't
cover the South African rand, but although the majority view amongst
strategists if for a weakening of the rand, foreign emerging market managers and other investors hold and continue to purchase high yielding rand bonds.
A few strategists are taking a contrary view, contending that the dollar
could surprise the market and rally. Mitsui Precious Metals' Andy Smith
attended a recent Bank Credit Analyst conference in London and found that
several economists and technical analysts were convinced that the dollar
would fall out of bed. Mr Smith, who was odds with the majority in the
market and forecast a gold boom soon after September 11, contends that the overwhelming bearishness "provides a most conclusive 'buy' signal". The view that there will be wholesale dumping of dollars by Asians www.marketpredict.net and others, ignores the reality that
Japanese foreign exchange support of the yen will change more slowly than
the tea ceremony, he says.. China will take only token measures to free its
currency, the renminbi.
Arguments of impending Apocalypse are at least 20 years old, contends Mr
Smith. Who knows whether any dollar adjustment will be disruptive? Long
before the dollar's demographic case matures, the alternatives, such as the
euro. It is however, extremely dangerous to try and pick the bottom of a sliding currency. History has shown that the final run can be worse than expected. That is why the current support levels are so critical.
Neil Behrmann
Editor of www.marketpredict.net
1 November 2003
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