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5 Reasons Why the Dollar Could Continue to Lose Value

Last updated 11/9/2009 10:35 AM ET (GMT -5) 6 Comments

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Kathy Lien

Director of Currency Research, GFT

Freshly back from Australia, I am hardly surprised by the fresh wave of dollar weakness.  Over the past few months we have talked extensively about why the dollar could continue to fall.  As the EUR/USD cracks above 1.50 for the second time in 2 months and USD/JPY extends its losses below 90, there are many reasons why the overall trend in the dollar is still down.

5 Reasons Why the Dollar Could Continue to Fall

1. Dollar Carry Trade Overused but not Overplayed

The primary reason why the dollar is weakening is because of the overused term "dollar carry trade." However although it is overused it is not overplayed because we have long said that how the dollar performs will depend upon where the Federal Reserve stands compared to the rest of their peers.  Last week, the Fed reaffirmed their steady as she goes mentality by leaving the FOMC statement virtually unchanged.  The Fed is very happy with the way things are right now and are not in a rush to unwind Quantitative Easing. In contrast, the central banks of Australia, the Eurozone and even Japan are much more likely to continue "deloosening" monetary policy.  We still believe that the U.S. central bank will be amongst the last to raise interest rates and for that reason, the dollar carry trade should remain intact.  Back in October, we published this chart of how close the market believes each of the major central banks are to raising interest rates and for the most part, it still applies.

2. G20 Pledges Continued Stimulus

The latest reason why the dollar is falling is because of the G20's pledge to provide ongoing stimulus.  More stimulus is positive for the equity markets which in turn has helped to lift the EUR/USD and other risk trades. Over the past 2 years, there has been an 80 percent correlation between the S&P 500 and the EUR/USD.  As long as members of the G20 are not paring back stimulus, high yielding currencies should outperform the U.S. dollar.  

Source: Bloomberg

3. Geithner Avoids Talking about the Dollar

Treasury Secretary Geithner also avoided talking about the U.S. dollar at the G20 meeting.  Typically, good old Tim likes to take this opportunity to reiterate the U.S.' strong dollar policy and his failure to do so may be more than just a careless mistake particularly in an audience of countries who hold massive dollar reserves and are fidgeting about the continued weakness of the U.S. dollar.  It is no secret that the U.S. only pays lip service to its strong dollar policy. In a low inflation environment such as today, a weak dollar helps more than it hurts the U.S. economy.

4. Economic Fundamentals

Friday's non-farm payrolls number indicates the tough economic environment in the U.S.  The unemployment rate has climbed above the psychologically hobbling 10 percent mark to 10.2 percent as job losses continued for the 22nd month.  Millions of Americans are out of work and could have a tough time finding work over the next year which means that we could be facing a particularly weak holiday shopping season.  Unless the U.S. labor market turns around, the impressive GDP growth that we saw in the third quarter may not be sustained.  

5. Little Technicals Support

Finally, there is little technical support underneath the dollar.  Taking a look at the dollar index, 74.93 is the 14 month low and the index is trading just above that.  If this level is broken, the next major point of support is not until 71.50.  For the EUR/USD a break above 1.5060 opens the door for a move towards 1.55 and for USD/JPY support is at 87.  Futures trades have also trimmed their bets on dollar weakness which means that a break of support levels could encourage a wave of new short dollar positions.

Source: Bloomberg

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Comments (6)

FXDragon

November 09, 2009 at 11:26 AM ET

Great to have you back! Welcome.
What does the number for dollar index mean? I mean how did they create that number.
Also, if futures did not trim bets, would it not be possible for dollar to weaken?

Thanks,

Neal

November 09, 2009 at 05:01 PM ET

The US Dollar Index (USDX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies.

It is a weighted geometric mean of the dollar's value compared only with

* Euro (EUR), 57.6% weight
* Japanese yen (JPY), 13.6% weight
* Pound sterling (GBP), 11.9% weight
* Canadian dollar (CAD), 9.1% weight
* Swedish krona (SEK), 4.2% weight and
* Swiss franc (CHF) 3.6% weight.

klien

November 10, 2009 at 11:38 AM ET

Thanks for answering this question Neal

dealer

November 12, 2009 at 07:30 AM ET

hi Neal
You can explain more about you explain the figures and how do you extract these numbers .
thanks again .
regards

klien

November 12, 2009 at 09:05 AM ET

These numbers are widely published. Here is the wikipedia link:

http://en.wikipedia.org/wiki/U.S._Dollar_Index

dealer

November 12, 2009 at 09:57 AM ET

Thank introduction of this link. But I mean plan question is whether we can analyze by usdlfx-eurlfx-gbplfx-..... a deeper recognition of the path following the fx intensify?whether lfx can change direction faster than the FX FX show?
Thank s again

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.