| Strange dollar effect on the market Original Source Link: (May no longer be active) http://www.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1075982775387&p=1059656430155http://www.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1075982775387&p=1059656430155
Financial Times Lex: US dollar Published: Feb 25 2004
Something strange is happening in foreign exchange markets. Usually, the dollar and Wall Street tend to move in tandem: when investors buy US assets, they need dollars to pay for them. Recently, however, the dollar has tended to rise against the euro whenever the US stock market weakens, and vice verse. Moreover, export-heavy manufacturing indices seem less responsive to exchange rates than the whole market. Equity investors are, then, not simply cheering the effect of a falling dollar on the competitiveness of US exporters.
It is hard to believe that traders have suddenly adjusted their medium-term expectations for, say, US import demand, based on the erratic intra-day movements in the stock market. Instead, the dollar's depreciation may be making US shares look irresistible to foreign investors whenever Wall Street weakens. Purchasing power parity suggests that the euro has overshot. When it returns to its long-run equilibrium, the euro-dominated value of US assets should increase, compensating European investors for the high valuation of US shares.
America's economic imbalances suggest it will need a weak dollar for years. And in a market driven as much by rumoured interventions as by fundamentals, predicting short-term trends seems a mug's game. But with most people expecting weakness, the dollar might be in for some temporary relief as private investors snap up US assets again.
|
|