Bottom Feeding the Dollar

Haven't pulled the trigger yet, but I'm intrigued at the idea of making a nice wager on the Dollar vs. the Euro.

It's not that the Dollar has such great fundamentals behind it right now, but the Euro? Why all the love? It's not like there's any oil there, nor are the European governments paragons of fiscal discipline. Stories like the ones yesterday, of European shoppers flying to the US for a leather jacket coupled with the Euro currency becoming a pop culture phenomenon help to crystalize the idea that perhaps that perhaps this is a bit overdone. Certainly it's hard to find anyone who will stick up for the lowly Dollar. 

But the currency does have a friend at Barron's

Thus, it comes as something of a surprise that GaveKal, an international investment-research boutique with offices in the U.S., Hong Kong, Paris and Abu Dhabi, recently penned a report lauding the dollar's prospects against the euro. In fact, in a telephone interview from Paris, firm founder Charles Gave terms the euro "grotesquely overvalued" at its current level. In the next couple of years, he maintains, the euro should fall to its "parity" value of $1.05 to $1.10.

Gave, whose firm's good track record has won it a large institutional following in the U.S. and Europe, points to several secular factors that bode well for the greenback versus the euro. For example, rapidly aging populations in euroland figure to decimate working populations there and increase the governmental financial burden at a pace far faster than in the U.S. European countries such as France have far higher debt-to-GDP burdens than the U.S., especially when estimates of their unfunded pension liabilities for government employees are figured in.

Adding to this European fiscal burden is a trend that Gave, out of political correctness, hesitates even to verbalize -- Islamization. Higher birth rates of Muslim populations that have been only imperfectly integrated into European economic and cultural life could pose big problems in the Old World over the next several decades. For one thing, the trend could boost unemployment.

Likewise, he sees the U.S. maintaining its lead over the euro zone in such prerequisites of wealth generation as productivity growth, research, product innovation and strong institutions of higher education. "Ultimately, currency values are determined by relative rates of return on capital, and here the U.S. has a decided advantage," he contends. (emphasis added)

(via Paul K)

Comments

[lauderdalian]

While I tend to agree with you, these signals don't always indicate a bottom. I remember being in Argentina in 2004 and people talking about how the currency was so weak, people from Chile were flying to BA just to go shopping.

Well, the Argentinians have managed to keep mismanaging their economy and their 10%+ inflation has kept their currency in a free fall (or rather, flat vs. the USD).

http://finance.yahoo.com/currency/convert?from=ARS&to=CLP&amt=1&t=5y

[will rahal]

I think the Euro is a short at the 1.49 level.
I have posted on my site, how the low US Dollar has clearly become globally competitive as evinced by Exports soaring leading to an improving Trade Deficit.
the USD has deteriorated despite a rise in Real Interest rates. I illustraded the strong relationship between the price of OIL and the US Imports. A decline in oil prices bodes well for the US Dollar.
See "Oil and the US Dollar" at
www.wrahal.blogspot.com