The downtrodden U.S.-dollar has staged a powerful rally during the past four weeks, but consensus is that it will continue to trend down in 2010, as it has for about eight years now.
A familiar litany of factors is driving the dollar down. It's a litany that includes the low interest rate policy of the U.S. Federal Reserve Board, a debt-burdened government that will need to raise taxes and put additional weight on the beleaguered consumer and inflation fears that continue unabated as the presses work overtime printing greenbacks.
The greenback has fallen 35 per cent since early 2002 against a basket of six major world currencies. It had a sharp rally in 2008 and early 2009 during the credit crisis as investors fled to safety, but had given up most of those gains before its recent surge of almost 5 per cent.
(The average cyclical advance for the past 12 bear market U.S.-dollar rallies during a 40-year span is 10.6 per cent with a duration of about five months, according to a report by Martin Roberge, portfolio strategist and quantitative analyst with Dundee Securities Corp.)
The flip side of the coin is that while investors were dumping the dollar, they were buying the currencies and debt of other countries along with commodities in what is called the risk trade.
All major currencies, with the exception of the Japanese yen, have risen this year against the U.S. dollar, but the strongest performers have been the higher-yielding currencies (high-yielding government bonds), such as the Brazilian real, South African rand and the Australian and New Zealand dollars. The Brazilian real is up 43 per cent; the rand 36 per cent; the Australian dollar 30 per cent; and the New Zealand dollar 25.6 per cent. The Canadian dollar rose 17 per cent.
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Market Outlook 2010:
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“If there is a sell-off in risk assets, then we can expect these currencies to be hit hard,” said David Bloom, global head of foreign exchange research with HSBC Holdings PLC.
