Opinion: Greenback 8-year downtrend at an end?

The momentum behind the USD’s recovery in recent weeks on the world currency markets seems to be gaining strength. Up until a few weeks ago the USD was still in a 8-year downtrend mode against other major currencies (although the USD Index did move in a sideways fashion through 2003 to 2005). All the negative news for the US dollar  over this past 12 months has come from the credit crunch and related banking crisis. Hopefully the worst is now past in that respect and currency markets are starting to focus back on underlying economic fundamentals. What they have found and realised is that the European economy is now faltering and the European Central Bank will ultimately be forced to cut interest rates (the same reality as every other central bank has concluded). Investment portfolio managers and currency traders around the world are now adjusting their currency risk positions and profiles away from the central “weaker USD” bias they have held for several years. The USD currency has turned the corner and the recovery from its low value position will be significant over the balance of 2008. The USD has recovered from its weakest point of $1.6000 against the Euro only a month ago to $1.4700 now. Further gains to $1.4000 are likely when European interest rates are inevitably cut. The EUR and AUD currencies have taken a hammering against the stronger USD in recent weeks as their two respective central banks belatedly wake up to what the central banks in the US, UK (12 months ago) and New Zealand (2 months ago) have already implemented i.e. loosening monetary policy in response to the sever economic downturn. The Australian dollar has suffered a classic double-whammy with lower interest rates and weaker mining/metal commodity prices.  A major global currency market re-alignment in values appears to be now underway, the NZD is unlikely to make any further gains against a fundamentally stronger USD. This is the first time in many years the international foreign exchange market trends have been negative for the NZD/USD rate. The stronger USD forecast suggests a continuation of the NZD slide to 0.6500 and lower. The speed of further NZD depreciation from here, however, may be somewhat slower than what we have seen in recent weeks. ------------------ *Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com.