Currencies | Jun 04 2009
By Chris Shaw
A combination of some worse than expected economic data out of the US overnight and investor willingness to take some profits off the table given the recent weakness in the US dollar was enough for the greenback to stage a minor rally overnight, a not unexpected move say forex analysts at Standard Chartered given the oversold nature of the Dollar Index at present.
The group’s forex strategy team suggests further gains in the US dollar are possible in coming sessions given short-term technical momentum indicators such as stochastics and RSI are presently bouncing from deeply oversold levels and the MACD sell signal from the end of April appears about to reverse.
While such a rally could be powerful, the strategy team is concentrated on the medium-term and here it suggests the US dollar remains overvalued, particularly against emerging market currencies. The group is not alone in this view as it notes Washington D.C. based think tank the Peterson Institute for International Economics suggests the greenback is too expensive against the majority of the 29 currencies it studies.
For such a change to occur, which implies the Real Effective Exchange Rate (REER) moving from an overvalued to a more fair value position, Standard Chartered suggests either inflation needs to come down or there is a fall in the Nominal Effective Exchange Rate (NEER), or some combination of both factors.
The fact US headline inflation has now turned negative is a good thing in terms of improving the US’s economic competitiveness, but the group estimates the currency must fall further in NEER terms to restore equilibrium to markets to the extent US assets become more attractive.
In other words, the current bounce in the US dollar is temporary and the general weakening trend will again dominate in coming months.
