|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)
This document is prepared for reference purpose only. The above views are the personal opinions of the author. The content herein is not intended to provide professional or investment advice and should not be relied upon as such. This document is prepared on the basis of materials obtained from sources believed to be reliable but accepts no liability in relation to the use of this document or the content herein for any purpose. The Bank does not make any representation or warranty and accept no responsibility or liability as to the accuracy, completeness or correctness of the content herein. The content herein is subject to change without notice. You are advised to seek independent financial and professional advice before you trade or invest. You should carefully consider whether trading or investment is suitable in light of your own financial position and investment objectives. This document does not constitute an offer or an invitation to any person to sell, purchase, subscribe or transact any product or service mentioned herein. Investment involves risk. The prices of securities, funds and other investment products may fluctuate, sometimes dramatically. The price of securities, funds and other investment products may move up or down, and may become valueless. It is likely that losses will be incurred rather than profits made as a result of buying and selling securities, funds and other investment products. Past performance is not indicative of future performance. You should carefully read the offering documents for details before making any investment decision. The Bank, its related companies, their directors and/or employees may have positions in, and may effect transaction in, the products and services mentioned herein. Foreign currency investments are subject to exchange rate fluctuations which may provide both opportunities and risks. The fluctuation in the exchange rate of foreign currency may result in losses in the event that the customer converts the foreign currency into Hong Kong dollars or other foreign currencies. Bank of China (Hong Kong) Limited will not be liable for the quality of products and services provided by the participating merchants. The tables and diagrams are for reference only.