I predicted that the dollar would fall this year and I was wrong about that. But I just cant see how the dollar can ever never fall enough to solve our trade imbalance.
Strong Dollar Scares a Few Bears
Recent Rally Has Some Analysts Thinking the Gains May Extend Into the Beginning of Next Year
November 14, 2005
Most everyone on Wall Street predicted the dollar's three-year bear market would get even worse this year. And, despite its impressive rally in recent months, most are again calling for dollar declines in 2006.
With the U.S. currency climbing to a fresh two-year high against the euro Friday and hovering around a 26-month best against the yen, there are nascent signs the bearish consensus may be splintering. A few analysts are even arguing that the dollar could strengthen further next year.
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As Mr. Thayer's camp sees it, the driving factors behind this year's dollar rally should remain intact for much of next year. U.S. interest rates will stay well above those of its major trading partners, like Europe and Japan, and this will continue to attract foreign capital to higher-yielding U.S. assets. These foreign flows will support the dollar, keeping longer-term concerns about the ballooning U.S. trade deficit in the background.
Many analysts and economists can't shake their concerns about the U.S. structural imbalances. They suggest that the interest-rate story will run its course by the first half of 2006, when the Federal Reserve is expected to stop tightening, slowing the flow of overseas money. Then the market's focus will return to the trade deficit, where a weaker dollar is considered vital to correcting this imbalance because it would make U.S. exports cheaper and imports more expensive.
By next year, most U.S. companies will be finished repatriating their overseas profits to take advantage of a limited discounted tax rate. Analysts estimate that about $100 billion of these earnings had to be converted from euros or other currencies to dollars, and that these transactions are playing a role in the dollar's recent gains.
