Dollar's prospects may be brighter after long drop

[August 16, 2008]  NEW YORK (AP) -- The buck may be turning into a bull.

The U.S. dollar extended its recent rally against major currencies on Friday as commodities fell and European and Japanese economies faltered. After sliding for years, the dollar may finally be on the way back up, some analysts argue.

The currency rose against the pound for the 11th straight day on Friday, to $1.85 - its longest winning streak in 37 years. As recently as July, one pound would buy two dollars. At the same time, the dollar climbed to its strongest level in almost six months against the euro, which fell to $1.47, and to near a seven-month high versus the yen.

So far, the trend has helped push oil prices lower. Long term, a stronger dollar has a range of consequences. It makes imports cheaper for Americans, and makes it more expensive for foreign companies to buy U.S. assets such as Anheuser-Busch Cos., which is being sold to Belgian-based brewer InBev for $52 billion.

A stronger dollar would probably come as a relief to many European businesses, too, since it makes their exports to the key U.S. market more price-competitive.

The dollar reached an all time low on July 15 of $1.60 to the euro, down from a peak of 82 cents to the euro in 2000. The dollar's decline is blamed on the large U.S. trade and budget deficits, investment flows out of the United States, and lately by interest rate cuts by the Federal Reserve.

Some think it's only up from here. The dollar is now benefiting from the widespread sense that prices for commodities such as oil and gold are on the brink of a massive fall, as traders gamble that a slowing global economy could lead to diminished demand.

"There's a fear that the whole commodity boom is going to end, that the bubble is going to burst," said James Hughes, market analyst at financial traders CMC Markets. "That's giving the dollar a bit of cheer."

Oil dropped below $112 a barrel on Friday - down almost 24 percent from its all-time high of $147 a month ago. A rising dollar typically pushes oil lower as investors who buy crude and other commodities as hedges against inflation start dumping their positions to cut their losses. A stronger greenback also makes dollar-denominated commodities more expensive to overseas buyers, further eroding demand.

Gold, silver and copper are also trading at multi-month lows, with the spot price of gold falling as far as $789 an ounce - its lowest since December. Prices for vegetable oil, corn, wheat and rubber are falling, too.

As a result, investors who pulled money out of dollar-denominated investments and poured it into commodities are now reversing course - and buying dollars again.

The dollar is also profiting from weakness among many of the rich nations' economies.

On Thursday, the European Commission said the economy in the 15 countries that use the euro shrank by 0.2 percent in the three months to June, as inflation driven by higher commodities prices wiped out growth. It is the first time since the launch of the euro that the region of 320 million people has suffered negative growth. Japan also reported economic shrinkage last quarter.

Meanwhile, fears that Britain is heading for recession - amid plummeting house prices, plunging consumer confidence and rising inflation - worsened on Wednesday after Bank of England governor Mervyn King predicted that the British economy would stagnate for the next year.

"The U.S. was the first economy to hit trouble" in the current global economic and financial crisis, said Tim Clayton, chief strategist at currency advisory consultancy Investica. "Now people are realizing that the problems aren't limited to the U.S. In some places they might even be worse."

An HSBC research note published Friday agreed: "The USD's upward momentum is developing freight-train-like qualities, shredding those who attempt to fade the move but rewarding those on board."

It said any temporary dollar dips would be limited by strong fundamentals - "primarily the notion that the rest of the world is finally following the U.S. down the tubes."

President Bush and Treasury Secretary Henry Paulson say they favor a strong dollar, but the key may be the shifting stance of the Fed. It's clear, economists say, the Fed is done cutting interest rates for now with inflation at a 17-year high of 5.6 percent. Cuts boost growth, but can worsen inflation.

Lower rates would weaken the dollar by causing deposits in the currency to become less profitable and triggering investors to sell it. And now it's Europe's turn to face the prospect of lower rates, as the Bank of England and European Central Bank may need to cut to boost flagging growth.

There is less consensus on whether this is the beginning of a long upswing, or a correction of runaway pessimism about the dollar that will flatten out at around these levels.

"We have seen the lows of this multiyear cycle, but I don't see the dollar going on a long bull-run at this point," said Investica's Clayton.

Others, like CMC's Hughes, argue that there is good evidence, looking at historical cycles, that this could be the start of relatively steady long-term dollar gains.

"The cornerstone of technical analysis is that history repeats itself," he said. "In that case, this could be the start of the bull-run that leads us up to a strong point at the end of the decade."

---

Associated Press Economics Writer Marty Crutsinger in Washington, D.C. contributed to this report

[Associated Press; By EMILY FLYNN VENCAT]

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.