US rebound strengthens greenback
THE combination of a US economic rebound and European interest rate cuts are driving the US dollar higher.
There is still distrust for the US unit in the market since rallies have faltered periodically.
Nevertheless, the deutschemark-dollar chart of Investment Research of Cambridge shows that the dollar bottomed at 1.39 marks in September 1992 and then rallied rapidly to 1.60 in subsequent weeks.
In the past year, the dollar has mainly been consolidating in the 1.60 to 1.70 marks range.
The market has consistently failed to drive the dollar below 1.60 for long and it briefly soared to 1.75 during the European currency crisis.
John Cuningham, managing director of Investment Research, a technical analysis consultancy, contends that the dollar must decisively break through the 1.70 to 1.75 barrier to confirm a bull market.
Fundamentals indicate that there is a good chance that it will do so.
The majority of forecasters in our global foreign exchange panel thus believe that the dollar should be bought whenever it dips.
The average forecast is 1.72 marks in three months, 1.73 in six months and 1.76 in 12 months.
Several bulls contend that it will hit 1.80 to 1.90 by this time next year.
Our forecasters contend that the yen has peaked.
Economic weakness and rising unemployment will pull it lower. Continental European currencies, particularly the French and Belgium Francs, are expected to slide as high unemployment and slack economies force politicians to slash interest rates.
Ahead of elections in the coming year, currency pressures should increase.
The Canadian dollar is an excellent case study, falling by eight per cent against the US dollar in the months ahead of the elections.
Canadian voters were more concerned about unemployment of 11.3 per cent than success in grinding inflation down to two per cent.
European politicians will undoubtedly be concerned about the virtual obliteration of the governing Progressive Conservative Party which was left with two seats in the Canadian House of Commons, against 153 previously.
The US and Asian economies and hence their currencies are thus well placed to outperform their European and Japanese counterparts.
Adjusted for inflation, the US economy expanded at an annual rate of 2.8 per cent in the third quarter, above expectations of 2.6 per cent.
Excluding flood damage to crops, the growth rate was 3.4 per cent. The export market of US companies was hurt by recession in Europe and Japan.
Yet the domestic economy is growing at an impressive rate of four per cent and it appears that the solid performance will continue into 1994 and growth is estimated at three to four per cent, way above Europe and Japan.
Despite its slow revival in the past year, the dollar is still competitive.
According to purchasing power parity calculations the dollar is worth 1.95 marks, according to Barclays, while the yen's PPP is 160. Sterling is valued at $1.45.
A study by Washington consultant McKinsey Global Institute shows that contrary to popular belief, the US has a significant productivity edge over Germany and is far better than Japan in several notable industries.