What has gotten into the dollar? For the past three years the greenback has been in a funk against just about every major currency on the planet. Mounting gloom over America's trade deficit, economic growth, and even the war on terrorism preoccupied currency traders. But in the past few months the dollar has been confounding forecasters -- and whipsawing short-sellers -- by rebounding sharply. Goldman, Sachs & Co. (NYSE:GS - News) took the unusual step on June 13 of changing its near-term currency outlook for the second time in less than a month to jump on the dollar bullwagon. It is projecting that the buck will appreciate to $1.15 against the euro and 110 yen by mid-September, from the $1.20 and 108 yen it projected initially. It now trades at $1.21 to the euro and 108.94 yen.

So far this year the dollar has gained 5.3% against the British pound, 6.1% against the yen, and 11.8% vs. the euro. What's more, there are few signs that it will give up its recent gains soon. "There has been a seismic shift in thinking about the dollar," says James McCormick, London-based global head of foreign exchange research at Lehman Brothers Inc. (NYSE:LEH - News)

Some of the U.S. currency's newfound strength is a reaction to the faltering euro, which has been hit not just by doubts about the health of the euro zone but about the viability of the single currency itself. Europe's doldrums -- euro zone growth is projected to top out at 1.6% this year -- have rekindled a long-smoldering debate about whether the European Central Bank needs to cut interest rates. The ECB has resisted those calls, but if it reconsiders, an interest-rate drop would have a negative impact on the euro. And while French and Dutch voters' recent rejection of the European Union constitution was widely expected, it drew attention to the policy discord at the core of the EU. A few politicians, particularly in Italy, have even dared to suggest that the one-size-fits-all nature of the euro is the problem. Although no one expects the euro to collapse, the debate is contributing to an uncertain atmosphere in foreign-exchange trading pits.

Meanwhile, Japan's hide-and-seek recovery has done nothing to strengthen the yen. "Although the economic data are improving, people have basically been disappointed with Japan," says Paul Sheard, an economist at Lehman Brothers in Tokyo. "The Bank of Japan has been in an almost continuous easing mode for 14 or 15 years."

Buying American Compared with Japan and much of Europe, prospects in the U.S. look positively balmy, with growth expected to hit 3.6% this year. While inflation remains low, Federal Reserve Bank Chairman Alan Greenspan has been signaling that more rate hikes are in the offing. The upshot is a widening differential in bond yields. The U.S.'s historically paltry 4% yields on 10-year notes are generous compared with yields of 3.1% in Europe and 1.3% in Japan for similar issues. That's attracting investment in Treasuries and other securities -- and buoying the dollar.

Plus, foreign money washing onto American shores continues to underwrite the U.S. current account deficit, which last year was $668 billion, or 5.7% of GDP. Many see a looming dollar crash in that number, but in fact the balance-of-payments crisis could be getting less critical. March and April trade data were better than expected, with the deficit well below the high levels of January and February. That has led to talk of a leveling out -- another boon to the dollar. "It is still early days, but the recent data (do) suggest that the U.S. trade deficit may be stabilizing," Goldman Sachs noted in its recent report.

Better yet for dollar bulls, the U.S. government's fiscal deficit is also coming in much lower than last year's $412 billion, or 3.5% of GDP, thanks to increased tax revenue and slower spending. "The U.S. fiscal situation is improving for the first time in several years, and that is playing a role in the psyche around the dollar," says Lehman's McCormick.

Of course, sentiment in the currency markets is notoriously fickle. An expected revaluation of the Chinese yuan later this year, for instance, could trigger wider appreciation in Asian currencies, including the yen. And if euro zone GDP starts to stir even a little, dollar holders could head for the exits. But for this summer, at least, the dollar is having fun in the sun.

http://news.yahoo.com/s/bw/20050629/bs_bw/b3941105mz020

 

One reason the fiscal deficit is lower is that Major US corporations are taking advantage of a limited tax advantage on repatriating of foreign profits. This is a one time - limited gain.

http://www.twincities.com/mld/pioneerpress/12038074.htm

http://www.rsmmcgladrey.com/Resource...A_Overview.pdf


Also, its no secret to foreign currency traders that when the Fed is raising short term rates - that generally provides support to the dollar.

Given that the US economy is feeding off of a heavily debted consumer who's counting on real estate asset appreciation -- something's gotta give.

 

The dollar's rise continues, which is good news for Americans traveling to Europe this summer but a mixed blessing for U.S. businesses and the overall economy.

The dollar rose Tuesday against the euro to the highest level in nearly 14 months and hit multimonth highs against other currencies, including the Japanese yen. The dollar is up 10% against a basket of major currencies this year, according to the Federal Reserve.

The main factor driving the dollar's gain continues to be the comparative strength of the U.S. economy, particularly in relation to the much weaker European economy. "It's a flight to safety situation," says Cliff Waldman, global economist at Manufacturers Alliance/MAPI, which represents manufacturers.

Expectations that Fed officials will continue to raise interest rates while their counterparts around the world keep borrowing costs steady are also propping up the dollar. Higher interest rates in the USA offer greater rates of return on dollar-denominated assets.

Economists surveyed by USA TODAY June 21-27 said they expected the dollar to continue trading at about the current level against the euro through 2005.

Many of the 55 economists in the survey, including those at JPMorgan Chase and Bear Stearns, say the impact of the dollar's rise on the U.S. economy has been minimal. The dollar fell a long way in the past three years and, therefore, still is relatively low, even with recent gains.

But there are signs that the dollar's rise is already hurting U.S. exporters, who are seeing their goods become more expensive on world markets as the U.S. currency gains. The Institute for Supply Management said Friday that its index of manufacturing export orders pointed to a slowdown in sales abroad — but not an actual decline — in June for the second consecutive month. The export index was the lowest since December 2001.

Waldman says there is a lag before changes in the dollar's value have their greatest impact on exports and the economy, because contracts aren't renegotiated every day to reflect changing prices. If the dollar continues to rise, "I might start to worry about 2006 a little bit more," he says.

The stronger dollar does bring benefits. It helps hold down inflation because it makes imports into the USA comparatively less expensive. That's significant because imports far exceed exports. The dollar's rise also helps Americans abroad because their dollars are worth more.

http://www.usatoday.com/money/econom...5-dollar_x.htm

 

Dollar's strength weakens overseas earnings
By Dan Roberts and Jennifer Hughes in New York
Published: July 10 2005 22:07 | Last updated: July 10 2005 22:07

Corporate America will have to do without one of its largest sources of growth this earnings season as the rapidly strengthening dollar reverses its flattering effect on overseas profits.


Year-on-year comparisons for multinational companies had been inflated for 12 quarters in a row by a weakening dollar.

Its steep rise against the euro and other currencies since January means second quarter figures out soon will instead see foreign profits translated at roughly the same rate as this time last year.

But the currency volatility means more than just an end to the quarterly supercharging of reported earnings.

It also threatens to disrupt the repatriation of hundreds of billions of dollars of foreign earnings built up over several years.

These real flows of money stem from a one-year tax amnesty granted by the US Congress to encourage US multinationals to reinvest money earned overseas in their businesses back home.

Since the amnesty began in January, large companies have announced plans to repatriate more than $100bn (£57.6bn)and earmarked up to another $150bn.

The problem is that delays in receiving guidance from tax authorities mean most companies have barely started the process.

Based on public disclosures, foreign exchange flows and client discussions, Citigroup estimates barely $50bn, a fifth of the total, has been returned so far.

Since the euro buys 12 per cent fewer dollars now than it did when companies first announced their repatriation plans, this could prove an expensive delay.Opinions differ on the exact scale of the problem, not least because some companies already have the offshore money in dollars.

Mark Graham, Citigroup's expert on repatriation, estimates that more than $100bn remains to be converted, mostly from euros, but also yen, sterling and Swiss francs.

He said: “People have been frustrated that they missed the opportunity [to bring back money when the dollar was weaker]. “We are beginning to have a lot more hedging discussions and in the last two or three weeks there has been a definite pick-up in awareness of this issue.”

But Bank of America said estimates of foreign exchange exposure were exaggerated because companies with the biggest planned repatriations, such as drug and computer makers, were most likely to account in dollars already.

Pfizer which plans to bring back the largest amount, nearly $37bn said: “We have almost no exposure to exchange rates on the repatriation as substantially all our offshore cash was already held in dollars.”


http://news.ft.com/cms/s/27b11930-f1...cl=,s01=2.html