Is The US Dollar About To Reverse Course?

For the first time in several years, the US dollar gained value against other major currencies in the world. During the first three months of 2005, the US dollar rose about 5% against both the yen and the euro. Considering that the United States is still facing increasing trade imbalances, the dollar rise should be considered significant. So far this year, currency traders have shifted their focus from the United States. Large trade and high current account shortages for high yields on US bonds. The recent strength expressed in dollars has somewhat shifted emotions within the financial markets about the future direction of the currency. A Bloomberg study released earlier this week shows that major currency traders expect the dollar to weaken again by the end of the year, but that dollar bear sentiment is much weaker than at the beginning of the year.

The strength shown so far in US currency in 2005 should prove to be short-lived. Strong growth in gross domestic product [GDP] over the past 18 months will begin to show signs of nearing normal levels in the coming months. The signs of slowing economic growth can cause a shift in emotions among currency traders to the more fundamental problems faced by the US economy. The US trade deficit and current account deficit show no signs of an immediate recession. In fact, future trade statistics show that the trade balance will worsen in the coming months. Poor economic growth continues in major developed countries other than the United States. This continues to put more pressure on the US dollar as US consumers continue to buy products produced in Europe, Japan and China.

We expect the dollar to decline gradually against most major currencies, but of course the main wildcard for the forecast is China. According to recent information from China's top decision-makers, the Chinese yuan has not rushed to adjust the current value of the yuan-dollar relationship. Talking about the possibility of a revaluation later this year, the currency traders are likely to benefit from the revaluation as they purchase the Japanese yen and other freely traded Asian currencies, thus accelerating the downward pressure on the US dollar. The