The Dollar looks to have bottomed according to Bank of Ireland

US currency has risen sharply across the board of late
Euro is depreciating as activity slows in Europe

“The dollar peaked in value against a basket of the major currencies in early 2002 and proceeded to fall by some 40% over the next six years. That cycle of dollar depreciation may now be at an end, however, as the US currency has risen by over 8% since the spring, with the past month seeing particularly strong gains. In the latter period all of the G10 currencies have fallen against the dollar, including sterling (8%), the euro (7%) and the Australian dollar (10%). Indeed, it is hard to find any currency which has gained ground against the greenback, with virtually all the Asian currencies declining, including China’s renminbi”, according to Bank of Ireland’s August Bulletin which was published today, 29 August 2008.

Commenting, Dr Dan McLaughlin, Group Chief Economist, Bank of Ireland and author of the Bulletin said: “All cycles tend to turn eventually, and one catalyst this time may be the relative performance of the US economy. It is an irony now, given market concerns at the beginning of 2008 that the States has grown faster than Europe in the first six months of the year, and has avoided the two quarters of negative growth commonly taken as a definition of recession. Moreover, growth in the euro area fell into negative territory in the second quarter and it is not inconceivable that GDP could also decline in Q3, given the relentless sequence of weak data of late.

“The latter has prompted a pronounced change in interest rate expectations, and the market is now giving some probability to an ECB rate cut by Christmas, and fully pricing in a quarter point reduction by April 2009. This has no doubt contributed to the euro’s fall against the dollar (it has also declined against most of the other majors with the exception of sterling) and another testimony to a change in investor sentiment towards the single currency is data on market positioning, showing that traders have now gone long on dollar and short on euro, in contrast to the general trend over recent years.

Foreign exchange markets are volatile and sentiment can change quickly so it is worth highlighting some important levels for the euro/ dollar, to gauge the significance of the current sell-off. From a longer perspective, a break below $1.42 would raise the probability that the move from 82.30 US cents to the high of around $1.60 is over, opening the way for a longer term depreciation for the euro. In the shorter term the break below $1.50 is important, with the next target for the dollar bulls at $1.4360. Our own forecasts incorporated a fall in the euro but we are now bringing forward that projected depreciation; we expect the euro to trade around $1.45 by end-September and $1.40 by end-year”, concluded Dr. Dan McLaughlin.

Ends

29 August 2008

For reference:

Dr. Dan McLaughlin
Group Chief Economist
Bank of Ireland Global Markets
Tel: 01 609 3221

Dan Loughrey
Head of Group Corporate Communications
Bank of Ireland
Tel: 01 604 3834 / 086 2412 470