A Dollar Rebound? Assume a Best-Case Scenario

If you think Fed Chairman Ben Bernanke is drawing a line in the sand with inflation and is therefore unlikely to cut interest rates much more, then the US dollar’s misery is probably over. If not, then you don’t know what misery is.

CNBC.com

Bernanke’s emphasis on inflation in the FOMC’s March monetary policy statement last week and policymakers’ decision to cut the federal funds rate three-quarters of a point rather than a full point was seen as directly supportive of the dollar in some quarters.

There’s little if any doubt in the mind of long-time Fed watcher David Jones, president of DMJ Advisors.

“For all intents and purposes, the Fed is finished cutting rates," says Jones, who says the central bank won’t go below 2.00 percent.

Jones says the “perfect way [to support the dollar] is to let the market think you're going to cut a full point and cut 75 basis points.” That's exactly what the central bank did when it only reduced the federal funds rate to 2.25 percent, rather than the 2.00 percent the market expected, he pointed out.

So with the Fed's help, the dollar is out of the gutter? Not everyone thinks so.

Boris Schlossberg, senior currency strategist at Dailyfx.com, says the dollar decline, which was beginning to appear un-orderly to some, is in something of a pause mode.

Sure, he says, it could rebound against the euro to the 1.50 level, after sinking as low as 1.59 around the time of the Fed meeting.

But Schlossberg and his company remain “serious dollar bears” long term because the Fed will take rates to 1.00 percent before it is done with its easing. “It is a slow-motion car wreck,” he adds, explaining that the housing problem will take awhile to unwind and correct.

A Long Way Down

Interest rate differentials – and a healthy share of speculation – have taken the US currency down to levels few imagined last fall, when the Fed started easing policy as the credit crunch emerged.

Since then the dollar has touched parity with the Canadian currency for the first time in four decades, reached two-to-one versus the British Pound for the first time in years, fallen through the psychologically important 100-yen level against the Japanese currency and touched record low after record low against the Euro, against which it has lost half its value in the past six years.

That deprecation – some might argue devaluation – has had greater ramifications than wounded national pride, credibility reservations about Bernanke and the Fed, or the dollar’s near century-old role as the world’s reserve currency.

It has helped fuel a boom in commodities prices, from crude oil to gold to copper to wheat, as well as provoke worries about stagflation for the first time in two decades ... negatives far outweighing any boom in US exports.

William Silber, an author and professor at NYU’s Stern School of Business, is among those who think concern about the dollar is over-done and short-sighted.

"I think the dollar is here because we have low interest rates and fears of a recession," says Silber, whose latest book is "When Washington Shut Down Wall Street". "Right now, the dollar is of secondary concern to the Fed."

CONTINUED: The Argument for (and Against) Serious Dollar Appreciation

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