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Investors should avoid betting the dollar will keep falling

Tue, May 12 2009, 06:36 GMT
by Benny Menashe

Finotec Group Inc.

The U.K. pound declined against the euro and the dollar amid speculation the recession is worsening as the Bank of England extends its asset-buying program. The U.K. currency breached 90 pence per euro for the first time since April 29 as the nation’s FTSE 350 Banks Index declined by the most in two weeks. Reports tomorrow will show house prices and manufacturing production declined, according to Bloomberg News surveys. The central bank said last week it will spend an extra 50 billion pounds ($76 billion) of newly printed money to spur economic growth. “The Bank of England’s aggressive stance with regard to quantitative easing is adding to concern about the economy and that is negative for sterling,” said Ulrich Leuchtmann, head of currency strategy in Frankfurt at Commerzbank AG, Germany’s second-largest bank. “We’ve seen a relatively strong upward trend in the euro against sterling.”

The current contraction may so far be following the economic law named for Victor Zarnowitz, the late expert on business cycles: Deep recessions are almost always followed by rapid rebounds. Consumer confidence rose by the most in more than two years in April as surging stock prices and falling mortgage rates boosted optimism. A gauge of U.S. manufacturing activity had its biggest bounce since 2005 as companies eased up on efforts to slash inventories. Even the crippled housing market has shown signs of stabilizing. In southern California, one of the hardest hit areas, prices have begun to stabilize, according to KB Home Chief Executive Officer Jeffrey Mezger. “We’re seeing a floor,” he said in a May 4 call with analysts. That’s giving the Los Angeles-based company an opening to sell newly built homes.

Investors should avoid betting the dollar will keep falling, according to UBS AG, the world’s second-biggest foreign-exchange trader. “The U.S. dollar has weakened on the back of improved risk sentiment, but we do question the sustainability of that trend,” Gareth Berry, a currency analyst in Zurich, wrote today in a note. “We would not recommend buying into U.S. dollar weakness at current levels.”

Today's Economic Events

Published on  Tue, May 12 2009, 10:43 GMT