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Why the Dollar Could Fall Another 5-7 Percent

Last updated 11/11/2009 10:01 AM ET (GMT -5) 10 Comments

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Kathy Lien

Director of Currency Research, GFT

As the U.S. dollar continues to press lower against the euro and Australian dollar (the AUD/USD rose to a 15 month high) and U.S. stocks reach new highs, many traders may be wondering how much further can the greenback fall. So far this year, the Euro has appreciated 7.50 percent against the dollar while the Aussie appreciated 32.5 percent.   Although these moves may seem large in the context of an average 1 percent move for each currency pair over the past 3 decades, there have been 4 years where the EUR/USD moved more than 20 percent in a single year and 15 years where the EUR/USD moved between 10 and 20 percent in one year. Interestingly enough for the AUD/USD, there has only been 14 times where the currency pair moved in excess of 10 percent.  The latest rally in the Aussie actually ranks right up there with the biggest move that we have seen in the currency pair over the past 3 decades which was a 34 percent rally in 2003.   Nevertheless, trends in the currency market can last far longer than most of us can anticipate, particularly given such a weak outlook for the U.S. economy and the dovishness of the central bank. Last night, Federal Reserve President Fisher said there are too many retailers in the U.S. and we could "lose some." As we mentioned in our daily report last night, if these retailers shut their doors, expect more layoffs. Fisher also said point blank that "now is not the right time to tighten." Like Treasury Secretary Geithner, Fed officials have no serious concerns about the fall in the U.S. dollar. According to Fisher, "dollar depreciation is not disorderly." So the question becomes - How Much Further Can the Dollar Fall?  

How Much Further Can the Dollar Fall?

In our opinion, the dollar could fall another 5 to 7 percent against the euro and Australian dollar. Reason being that the outlook for the U.S. economy is not going to change on a dime which means that the most realistic trigger for a bottom in the U.S. dollar and a top in the euro or Aussie would be coordinated verbal intervention by foreign policy makers at a G7/G8 or G20 meeting. So far the ECB has been comfortable with the rise in the euro but everyone has a breaking point. Another 7 percent rise in the EUR/USD would take the currency pair to 1.60, which is basically the record high. A 7 percent rally in the AUD/USD would take the currency pair to 0.9950 which is just shy of parity. There is a very good chance that these will be stress points for foreign central banks since they have been in the past but verbal intervention could occur even before we reach those levels, somewhere between the 5 to 7 percent mark. We expect this come in the form of harsh language from G20 policymakers. The following chart of the EUR/USD shows how changes to the foreign exchange language in the G7/G8 communique has previously triggered a top or bottom in the EUR/USD.  Now that G20 leaders have made the G20 meeting more important than the  G8, the FX language changes could come at either meeting. At some point, central banks will throw in the towel and say that they will no longer sit idly and watch the dollar fall.

In yesterday's daily report, we also talked about 2 other cases where the dollar could change trend. In our opinion, these 2 situations are less likely than verbal intervention from the G20. The first would be a double dip recession in the U.S. economy. The jobless rate in the U.S. has exceeded 10 percent and the fact that more companies are announcing layoffs means that unemployment may not have reached its peak. The difficult economic environment foreshadows a weak holiday shopping season that in turn could lead to more layoffs. Many retailers are banking on spending in November and December to stem their losses. The U.S. economy could handle a jobless recovery but a recovery without spending is not much of a recovery at all. The second scenario where the dollar could reverse its downtrend would be if U.S. growth accelerates beyond that of its peers. Given the current circumstances or even future circumstances, this is unlikely unless there is a sharp contraction in the Chinese economy or if the unwinding of monetary stimulus by other countries coupled with strong currencies start to take on toll on those economies.

EUR/USD Chart:

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Comments (10)

Semaj

November 11, 2009 at 11:51 AM ET

K, what do you make of the long bars as London signs off today? Also, will the Eur/Usd lead the dollar's reversal should it happen at least short term? Lastly, what is the key support level to watch if a double top is in place? Just incase we are cought off gaurd:)

klien

November 11, 2009 at 11:59 AM ET

Definitely not a good thing. The GBP/USD seems to be leading the moves. Near term support is 1.4940

FXDragon

November 11, 2009 at 04:38 PM ET

Foresight FXDragon: I think eurusd is gonna dive to at least 1.4840
Because i want my money:))

Qin

November 11, 2009 at 05:19 PM ET

Hey, Kathy
Always appreciate your view and analyst. Do you know that when the next G7 or G20 meeting will be?

Best regards
Qin

klien

November 11, 2009 at 05:21 PM ET

Possibly in Feb. No date set

moon

November 26, 2009 at 10:17 PM ET

Kathy, in you opinion. May I know the position for : USD/AUD And USD/IDR in short term and medium term? Thanks.

moon

November 26, 2009 at 10:17 PM ET

Kathy, in you opinion. May I know the position for : USD/AUD And USD/IDR in short term and medium term? Thanks.

Doobp

November 27, 2009 at 12:49 AM ET

My opinion (since kathy didnt reply): i believe aud will dip below 9000

Doobp

November 27, 2009 at 12:52 AM ET

MY GUESS is 8930 makes good support

moon

November 30, 2009 at 01:30 AM ET

what's your reasons, that you said USD/IDR 8930 and AUD / USD below.90 ? Thanks.

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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.