The U.S. dollar: Too big to fail?

August 31, 2009 07:00 PM

A slower recovery for the economy in Europe could mean a slower recovery for the euro. “The dollar is a better place to hold my money than the Eurozone, where it’s going to be the most anemic recovery of all,” Wilkinson says. “The European fundamentals have a tendency to be inherently weak and the ECB (European Central Bank) and the German government’s failure to adopt more stimulus measures is going to leave the Eurozone lagging behind in 2010. [It’s] difficult to be a euro bull.” He expects the dollar to go to $1.30 vs. the euro by year-end.

Dolan’s year-end target for the euro is $1.30-$1.32, and Lien says the Eurodollar could be at $141.50 by October. Cook expects the euro to hit $1.35 by year-end.

Frey looks for a year-end top side of the euro at $1.47. “The downside for the euro has already come to fruition. The ECB in particular was already well behind the curve and we couldn’t get all of the Western European heads all in the same mindset for what we needed to do from a stimulus standpoint,” he says.

As for the pound, Dolan says that the UK’s economy will recover faster than the Eurozone. “The major drags on the pound are the quantitative easing, and they’ll finish that up in August and announce they’re not going to do any more, and that will be sterling supportive. In line with the overall dollar view, we look for the pound to top out below $1.70 before September and move back to $1.55 to $1.58 by the end of the year,” he says.

Wilkinson, however, does not believe the British recovery is on track. “You’re not going to have a big rally in housing or commercial real estate in any of these economies. There’s going to be slower growth. The pound will go to $1.55 by year-end,” he says.

Lien says the pound could go to $1.66 by October. Cook says that by year-end, “If [the pound] breaks to the upside, $1.72 is very realistic; if it breaks to the downside, $1.55.” Frey expects some retracement in the pound in the short-term, finishing the year around $1.62.

Risk aversion also is connected to the yen. Frey offers a year-end prediction of 98 for the yen, while Wilkinson expects the dollar to buy 100 yen before year-end.

“The budding recovery is not bad enough to force the yen to 90 against the dollar. The dollar is more likely to appreciate against the yen as risk aversion gradually dissipates,” Wilkinson says.

Dolan says the dollar-yen is going to be higher in the fourth quarter on better growth prospects, improving risk appetites and higher rates in the U.S. that will drive treasury yields higher and dollar-yen higher with it. He expects it to be $1.02-$1.05 by the end of the year.

Risk and recovery are the recurring themes for the dollar and the currency market at large.

“The fundamentals for the dollar all come down to the recovery trade, when economic growth is going to resume. By the fourth quarter, we’ll have some more concrete data in hand that is going to suggest that there’s a return to growth,” Dolan says.

Cook says the fundamentals for the dollar are mixed. “Risk is hard to determine right now, which is why we see back and forth movement [in currencies]. There’s still a lot of weight on all economies and until that’s cleared up, it’s going to be a cage match between the dollar, pound and euro,” he says.

And although the dollar has been reacting negatively to positive economic news because of its status as a reserve currency, long-term, its strength depends on a U.S. economic recovery.

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