FX: Dollar Strengthens on Good News and Bad
Traders Magazine Online News, January 3, 2013
The U.S. dollar gained ground Wednesday and Thursday in global currency trading on good news and bad.
The good news: Federal legislators in the United States had come to an agreement that would avert the so-called ‘fiscal cliff’ of huge spending cuts and tax increases.
The bad news: The nation’s debt ceiling would have to be raised, signaling another bruising battle to come between Republicans and Democrats that find little common ground.
First, the good news. Royal Bank of Scotland analysts, in a client note obtained by MarketWatch, argued that the strengthening of the dollar on January 2 showed that the U.S. currency now can rise on good news, not just bad.
"We're witnessing a rare moment when the dollar is rallying along the global risk appetite. Although this has momentarily happened before in the past, it's risky to dismiss this as yet another 'cry wolf,'" they wrote Thursday.
The ICE dollar index, MarketWatch notes, rose to 80.026 from 79.847 by late Wednesday. That index tracks the U.S currency against six major rivals and had dropped to 79.393 shortly after the fiscal cliff deal was passed by Congress.
But the bad news that is anticipated also helped strengthen the dollar.
The “news”? That U.S. policy makers will not be able to reach agreement on raising the nation’s $16.4 trillion debt limit.
In such cases of economic concern, global investors flee non-U.S. currencies, ironically, and buy U.S. Treasury bonds as safe assets. This was seen, for instance, in August 2011, when Standard & Poor’s downgraded U.S. debt for the first time. Investors in that case bought … U.S. debt.
“All the way through the first few months of the year it will be fiscal policy and monetary policy which are at the forefront of people’s minds,” said Paul Robson, a senior currency strategist at Royal Bank of Scotland Group Plc in London, in a Bloomberg News report. “However, just because we’ve seen a rally, doesn’t mean we have seen the last of a weaker dollar story.”
The dollar rose to $1.3162 per euro at 9:28 a.m. London time, its strongest price since Dec. 14.
Nonetheless, Morgan Stanley currency analysts, in an end of year note to clients, said, “we expect the U.S. dollar to put in a relatively robust performance in 2013’’ in a “positive environment” of investment and employment.
Morgan Stanley predicts “moderate appreciation” for the dollar, with its U.S. dollar index gaining about 6 percent during the year.
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