Currently, market attention focuses on the appeal of the U.S. dollar after the second round of Quantitative Easing (QE2) monetary policy.
It is difficult to predict whether the U.S. dollar will see a boost or a decline. From several structural perspectives, the U.S. dollar is not appealing. Firstly, the U.S. dollar should undergo a devaluation as money supply has drastically increased after two rounds of Quantitative Easing policies. The situation will not change in the short run. Secondly, the U.S. is heavily in debt and should wait until early August for voting to raise the debit ceiling. Regardless of the voting result, the currency of a heavily indebted country can hardly be attractive. Thirdly, the U.S. monthly trade deficit has been widened deeply from over US$20 billion in mid-2009 to US$50.2 billion in May 2011. Finally, no one would be interested in buying a currency that pays no interest rate. As such, the U.S. dollar can hardly get stronger fundamentally.
Notwithstanding the above, investors should be aware that the U.S. dollar can drastically rebound under certain circumstances. Firstly, the U.S. dollar might benefit from a possible economic upturn in the U.S., which result in withdrawal of stimulative policies as well as rising of interest rate. Besides, any bad news or global economic meltdown could fray investors’ nerve, causing them to sell high risk assets and buy the U.S. dollar. This could drum up the demand for the U.S. dollar, therefore the U.S. dollar will become strong as a result. European debt crisis happened in 2010 was a typical example.
It is generally believed that the U.S. economy can hardly recover in the short run. In the Federal Open Market Committee meeting held in June, the Federal Reserve expressed its concern over the economic outlook and its stability of loose monetary policy in the coming months.
In a nutshell, the U.S. dollar will rise with the worries arising from the global economic uncertainty. The foreign currency market is very dynamic. Therefore investors’ attitude and their short, mid and long-term investment strategies are the keys to take the pulse of the trends of the U.S. dollar.
Source: Investment Product Specialist
Global Markets Product Management (Investment)
Bank of China (Hong Kong)
July 2011
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