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Dollar Up as Greece drags down Euro |
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Tuesday, 16 February 2010 |
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 A dramatic turn in sentiment in favor of the dollar and against the euro continued Monday, with lingering fears of a possible European debt crisis pushing the greenback to its highest point in nine months.
Among investors, the question a few months ago wasn't whether the U.S. dollar would decline in value, but rather how far and how fast.
The currency's surge is throwing a monkey wrench into the plans of corporations and investors who were betting on a weak dollar.
The euro extended recent declines Monday, slipping to $1.36 from $1.3618. That came on the heels of last week's fifth-straight weekly gain by the U.S. currency. The dollar is up more than 5% against the euro this year.
Sentiment has flipped on the world's two major currencies. Greece's woes amid a soaring deficit have exposed the fragility of the 16-nation euro zone's government finances and the Continent's recovery, overshadowing any nervousness about the American economy and the massive U.S. budget deficit.
The European Central Bank is now seen as having to delay interest-rate increases in order to prop up growth, while the Federal Reserve appears on track to begin tightening credit sooner rather than later. Higher rates tend to draw investment into a currency, all things being equal, thus boosting the dollar's prospects over the euro's.
In addition, moves by China's central bank to limit the amount of credit in that fast-growing economy are raising concerns about a global rebound that was seen favoring commodity-linked currencies such as the Australian dollar or Brazil's real.
While rallying against the euro, the dollar remains relatively weak against the Japanese yen. The current 89.97 level is well below the 94 range where it traded for most of 2009.
The dollar's rebound has done little to diminish Westerners' calls on China to revalue its currency, the yuan, which is essentially pegged to the dollar and seen by many as undervalued and a risk to the global economy.
Many economists say they expect the Chinese government to allow the yuan to rise slightly against the dollar some time this year. Markets are pricing in a roughly 2.4% gain over the next 12 months. U.S. Treasury Secretary Timothy Geithner said recently he thinks it is "quite likely" that China will let the currency move.
China, one of the world's largest economies, largely has brushed off international pressure thus far to revalue. But it may be swayed by rising inflation, and a desire to fend off a risk of an overheating economy. A rise in the yuan, also known as the renminbi, would cool the economy by making imports cheaper and exports more expensive.
Suddenly, the U.S., with its 5.7% economic growth rate in the fourth quarter, is shaping up as a safe haven once again.
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