Can This Currency Be Saved?


Just about every currency trader is down on the dollar.

If Fed Chairman Ben Bernanke says the right thing at his press conference, that could change - but don't hold your breath.

The dollar had a terrible week last week, and it's not making much of a comeback today. Instead, investors are focused on the upcoming FOMC meeting and subsequent Fed press conference on Wednesday, and what Chairman Bernanke might say about inflation, interest rates, and other critical currency matters. So I asked Camilla Sutton, chief currency strategist at Scotia Capital, what she thought might transpire.

"There is a lot he can say in terms of giving the dollar a lift," Sutton told me. "The forecasts are going to be important, and how much the FOMC has shifted thoughts, particularly on inflation."

But is Bernanke likely to change his views on monetary policy? Hardly, Sutton says. "I suspect the truth is we're a long way from seeing a more hawkish Fed," given the dovish views expressed by prominent Fed members in the last few weeks. Sutton doesn't expect a U.S. interest rate hike until the first quarter of 2012.

Plenty of traders evidently agree. They have been short U.S. dollars to the tune of roughly $30 billion for the last two months.

How much lower could the dollar go? Sutton thinks it could drop to $1.50 against the euro without much trouble.

Alan Ruskin, head of G10 foreign exchange strategy at Deutsche Bank, also thinks the dollar may have room to sink further. He looked at economic fundamentals in the U.S. compared to other countries with stronger currencies - notably Australia, where the Aussie has been regularly hitting new highs against the U.S. dollar. Given the countries' relative current accounts and other measures of economic health, Ruskin actually found that the U.S. dollar is significantly more overvalued than the Aussie. Ouch.

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