commentary by Michael L. Bromley
copyright 2005

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Jan 6/04: Update on my Dec 7 entry on the US Dollar:

Another of the late maniac news cycles has been the decline of the dollar. We're talking the stuff of full-on headlines and magazine covers, classic hysteria, that is. That news cycle morphed into this week's business on torture and Gonzalez, but more importantly in its sudden disappearance is that the dollar has bumped back a few pennies this week. Good or bad, that's not considered news.

I've been watching the currency markets since last March when I helped my girlfriend prepare for an expensive trip to Italy. She timed her buy perfectly, at the moment of the dollar's 2004 peak in May, and caught each of her euros for 1.19 greenbacks. Up to last week, the dollar lost another fifteen cents or so. Multiply those pennies by the billions of dollars of international commerce and that's money.

In early December I posited that the dollar decline against the euro was dollar weakness and not euro strength. It was fascinating to watch the currency markets react to the news: the trade deficit, unemployment, stocks, Iraq, oil, the Fed, and so on, each meant a dollar sell on or off, and gradually more off than on. Only 2004 didn't have that much bad news. It was more of the same over the year and far less than the year before: that is, 2004 brought mostly good news. So for the dollar it was two steps down and one step back up. Most observers now say the dollar will settle around $1.40 by the end of '05. That is, if things stay as are now the dollar will continue to fall. What, then, has driven the dollar back up in this week's half-steps? Nothing has changed. As ever, the minutiae of economic news translates into immediate moves. We learn nothing from that. Currency markets only make sense over long periods. This week it was bad news from Europe -- unemployment in Germany, production in France, whatever -- that drove the euro down, and not anything here sending the dollar up (give or take the Fed, which was anticipated). These bumps will continue each way, the question being which way go the larger steps

That is precisely why I'm even on the dollar over 2005: in all areas affecting the dollar it will be no worse news for the dollar and worse news for the euro. That can only mean a dollar drift not far from where it is now. Only seriously bad news for American can further hurt the dollar. All things the same, the euro won't maintain itself since the news is better here than there.
 

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