Dollar's uptrend

Dollar's uptrend against rivals has dark side

By Lisa Twaronite, MarketWatch
Last update: 6:00 a.m. EST Nov. 2, 2008

It was only July 15 that the euro hit a new record high of $1.6036 -- its loftiest level since the single European currency began trading in January 1999. Since then, it's dropped to trade at levels below $1.300.

In October alone, the euro as well as the British pound sterling fell more than 9% against the dollar, and the Australian dollar plunged more than 16% against the greenback. The Canadian dollar lost over 14%. As credit conditions tightened, equities sold off and fears of global recession rose, the resulting flight-to-safety flows favored the dollar over all but the even lower-yielding Japanese yen.

Cheaper imported goods - and therefore less inflation - may be good news for consumers here, but the resurgent greenback has a dark side, too. As worldwide economic growth slows, the stronger dollar makes exported American goods more expensive in overseas markets, and can hurt companies' global market share at a time when they can least afford to lose it.

The stronger currency also will discourage buyers holding other currencies from snapping up bargains at fire-sale prices, which is bad news for lenders hoping to unload all those foreclosed vacation homes.

"Europeans will no longer be looking at the U.S. housing market as a value. Now that the dollar is strong, it will sap foreign demand for U.S. goods which could slow the U.S. economy even further," said Kathy Lien, director of currency research at GFT.

"An overly strong dollar at a time when growth is weak should be very concerning for the U.S. Treasury. They did not complain about the prior weakness in the dollar because they knew that a softer currency was needed to avert a deeper slowdown," she said.
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Courtesy: UK Currency Broker | marketwatch.com