Published December 10, 2008

Is it possible that the US$ has peaked?

A turnaround will come, but it may be early days yet, the evidence suggests

By LARRY WEE
SENIOR CORRESPONDENT

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OVER the past week, Wall Street has made stunning double-digit gains in percentage terms, a good share of which were scored despite horrible US numbers like the latest US job losses for November - that totalled more than 700,000 after revisions for earlier months.

Elsewhere, a CRB index of commodity prices nose-dived 6 per cent to fresh six-year lows. At the same time, we have witnessed interest rate cuts aplenty across the globe, from central banks in Europe, Asia as well as the Antipodes, while US treasury yields tumbled to fresh lows. Over the weekend, India announced a one per cent interest rate cut and fiscal stimulus measures worth some US$4 billion.

Shortly after, we got wind that incoming US President Barack Obama is preparing a fresh fiscal stimulus worth US$500 billion to US$1 trillion, aimed at creating (or saving) some 2.5 million US jobs. Overnight, hopes rose that we'll see a rescue package for the Big Three US carmakers.

And, as a happy result, global stock markets rebounded handsomely, risk aversion fell, and the US dollar retreated. This week, Wall Street's most watched indices - the Dow, S&P 500 and the Nasdaq Composite index - closed in on our first topside correction objectives of 9,000, 920 and 1,600 respectively.

On the currency side, we saw the US dollar retreat towards first downside targets like S$1.50 yesterday, and the euro made another attempt towards US$1.30.

Meanwhile, badly punished Asian units like the Philippine peso, Korean won and Indian rupee rebounded as much as 2 to 3 per cent yesterday, while the Indonesian rupiah soared more than 6 per cent, from last Friday's closing levels versus the US dollar. Further north, the Chinese yuan (by one measure) recovered as much as half of last week's worst losses via non-deliverable forwards or NDFs.

And, so, it is natural to ask, if Wall Street can still go great guns despite sharp job losses and US interest rates threaten to fall to zero next year, does it mean that the US dollar has peaked and is headed south from here?

The quick answer is that it will happen at some point, but the body of evidence available to us today suggests that it may be early days yet at this point.

Here are some of the bigger picture considerations that prevent us from calling a cyclical US dollar peak just yet. For one thing, there is a growing fear that global GDP could fall further and faster in 2009 than is now assumed - and that is precisely the reason why governments all around are rushing out the big guns on both the monetary and fiscal fronts.

Short term, it is possible to hope for some kind of year-end relief rally of sorts. But beyond that, a deeper global recession in 2009 will spell more job losses, which in turn suggests more cutbacks in consumer spending, corporate investment and credit extensions.

That, it seems to us, must mean that corporate profits and therefore stock prices are in danger of getting worse before they get better. And, as we have recently learned, the US dollar tends to rise against just about everything except the yen in such a climate.

And there are some other - more indirect - themes which may find the greenback emerging as default winner. Down Under, a slowing Chinese economy and tumbling commodity prices cannot be good news for the Australian and New Zealand currencies. Yesterday, we also learnt that Japan is in a deeper recession than first estimated.

In the UK, even household names like department store Woolworths and furniture maker MFI have fallen on hard times, as property prices there fall even faster than in the US.

The euro, meanwhile, may find itself hobbled by worries on the Eastern European front. The recent Russian rouble sell-off is one warning sign.

In terms of specifics, Barclays Capital have suggested we need to see three key pre-requisites in place before we can say the US dollar has peaked: The end of a US dollar shortage offshore, a sharply steeper US yield curve, and a much sharper rise in US debt issuance. All are expected in good time, but they just haven't happened yet.