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Mix-Ansicht- MORE DOLLAR WATCH - leibovitz, 23.01.2003, 15:38
MORE DOLLAR WATCH
-->MORE DOLLAR WATCH
As you know, over the last year NDR has been on a negative U.S. dollar watch, and today I would like to review and update our main points. In our January 2002 Investment Strategy, Tim Hayes laid out a strong case for a major correction of the overvalued U.S. dollar versus both the euro and the yen as featured on purchasing power parity charts. Tim also spotlighted the fact that U.S. real interest rates were quite low relative to Japan and Euro real interest rates. As can be seen on the charts he featured - I230 (top of page 2) and I330 - the overvaluation of the dollar has been at least partly corrected, more so relative to the euro. However, if you look at I0259 (now updated on bottom of page 2) which he featured, the unfavorable yield spreads are actually worse now for the dollar. I prefer two other charts on relative interest rates - I248 and I250 - because they go back further and show broader global interest rates. Chart I250 has actually been negative since January 2001 while I248 went negative on January 2002. All remain negative. My Hotline of February 22, 2002 said,"the dollar is way too strong. I could argue that based upon purchasing power parity, but I prefer to just look at the real trade deficit on chart I255 (updated below) that is now at a record deficit." My point was that if the currency is near fair value then goods produced and sold should be competitive with foreign goods and the trade deficit should narrow. Yet, a huge jump to a record trade deficit in November was reported Friday. Especially in view of our supposedly huge productivity gains and the big drop in the dollar so far, this should not be happening, and it suggests the dollar needs to go lower. In our WebCast last week Tim again restated his negative view on the dollar featuring a special chart on two yield curves, both of which are negative for the dollar. My only real concern about a continuing negative U.S. dollar position right here is that a couple of polls of short-term sentiment of dollar traders shows bulls extraordinarily low at only around 10%! So a rally would not be too surprising. But currencies tend to be strongly trending and they can have multi-year moves, so I am more careful about using contrary opinion on currencies. In fact, in a Chart of the Day last Thursday, Seth Williams uses Commitments of Traders data which argues that speculators (who are bullish currently on the euro) actually have a very good record over the four years of euro trading. In conclusion, the major trend of the dollar remains bearish. For the stock market, the evidence is mostly neutral. I have a stop-loss at 865 on the S&P 500. --Ned
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