WORLD FOREX: Dollar Drops As Fed, US Economy Pessimism Grows

Wall Street Journal
By Javier E. David
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Suffering its worst monthly performance since September, the dollar weakened to a new 2 1/2-year low Friday as investors turned increasingly pessimistic about the U.S. economy and the policy prescriptions designed to improve it.

Longstanding worries among market participants about the Federal Reserve's ultraloose monetary policy have converged with growing concerns about the widening U.S. fiscal imbalance. Both are considered legacies of crisis-era stimulus policy that has kept U.S. interest rates at rock bottom, but sent the federal debt soaring to unsustainable levels.

As a result, the dollar is hunkered at multiyear lows against most of its major counterparts, many of which offer higher returns that make the greenback pale in comparison. In addition to the dollar's lack of yield advantage, data this week have fanned concerns that the U.S. economy could be losing momentum at the very moment the Fed is poised to wrap up its controversial $600 billion bond-buying program, scheduled to end in June.

"A weaker dollar is a consequence of what [policy makers] are doing," said Peter Schiff, president of Euro Pacific Capital and an implacable critic of the Fed. He expects the euro to retest its record high against the dollar above $1.60 within the coming months, if not weeks.

The Fed's loose monetary policy "is better than the alternative. They could raise interest rates to protect the dollar, but it would crash the housing market all over again and send the economy back into a recession," Schiff said. As a result, policymakers have little alternative but to behave indifferently to the dollar's slide.
Late-day position squaring in thin markets allowed the dollar to rebound modestly from the session's lows. However, most analysts agree that the currency's downward trend is likely to resume when trading resumes on Monday.

Late Friday, the euro was at $1.4810 from $1.4822 late Thursday, according to EBS via CQG. The dollar was at Y81.20 from Y81.54, while the euro was at Y120.28 from Y120.83. The U.K. pound was at $1.6708 from $1.6635. The dollar was at CHF0.8652 from CHF0.8736, a new record low against Switzerland's currency.

The ICE Dollar Index, which tracks the U.S. dollar against a trade-weighted basket of currencies, was at about 73.025 from about 73.121.

Friday's closing level put the dollar at its lowest level since July 2008, and the near-5% fall makes April the currency's worst monthly decline since September.

Data from the Commerce Department showed U.S. incomes grew in March, but spending slowed, as rising prices for food and energy squeezed consumers and restrained the economy.
Friday's figures followed a government report this week that showed the economy slowed sharply in the first three months of 2011.

"Growing risk appeal outside of the United States has turned to a mild concern that the world's No. 1 economy is possibly losing its head of steam at a time when the Federal Reserve no longer has use of relief" in the form of quantitative easing, said Andrew Wilkinson, senior market analyst at Interactive Brokers, in a Friday research note to clients. "The recovery in global growth has marked a similar rebound in inflation-bothersome commodity prices."

Because the Fed isn't seen tightening monetary policy until well into next year, market observers are increasingly convinced the dollar is likely to remain pressured across the board.