khaosworks | It's still the economy

Long-awaited relief rally is over in a flash
By Steve Johnson
Published: November 3 2004 19:39 | Last updated: November 3 2004 19:39

The long-awaited dollar relief rally came to an abrupt halt on Wednesday as the market immediately switched its attention to the long-term fundamental woes weighing on the US economy.

"Blink and you'll miss it," was the view of the 4Cast economic consultancy on the short-lived rally.

Dollar-bulls got pretty much what they wanted: a clear-cut victory for one candidate in the tortuous US presidential campaign. What's more, they got the devil they knew in George W. Bush.

But after a brief period of uncertainty, the greenback plunged lower, slumping 0.7 per cent to $1.2800 against the euro; 0.4 per cent to $1.8472 versus sterling, a 10-week low; and 0.8 per cent to SFr1.1959 against the Swiss franc, a decline described as "gut-wrenching" by Rich Bernstein, chief US strategist at Merrill Lynch.

Just for good measure, those dollar-bulls were left to explain away a fresh 12-year low of C$1.2117 against the Canadian dollar, in the wake of a 1.1 per cent slide, as well as a six-month nadir of $0.7548 to the Australian dollar, after a fall of 1 per cent.

The consensus was that the dollar had got its relief rally out of the way on Monday and Tuesday, when it rose at least 1 per cent against most European currencies.

With most observers fully expecting the greenback to resume its slide once the temporary rally was out of the way, the market decided to cut to the chase and get straight on with the selling, in the process rebuilding the short-dollar positions that were eroded earlier in the week.

"The dollar was going to go down at some stage anyway, so traders are making sure they have not got any long positions, and may be opening some short ones," said Chris Furness, senior currencies strategist at 4Cast.

"Most people thought we were going to have a relief rally so they were uncomfortable going into the election with big short positions," said David Bloom, currency analyst at HSBC. "They also thought they could rebuild their positions at better levels. But when they saw the dollar wasn't rallying it became a scramble to get short positions back on. That just threw petrol on the fire."

Just for good measure there was talk of the Reserve Bank of India selling dollars and buying sterling, possibly as part of a long-term rebalancing of its FX reserves.

Irrespective of the election, most observers see the longer-term trend for the dollar as shaky against a backdrop of rising external and federal deficits, slowing growth, and a de facto weak-dollar policy being peddled by both the US government and Federal Reserve.

These fundamental factors are already looming, with all-important October non-farms payrolls data due on Friday. Although a November rate rise is fairly certain, Mr Bloom sees the number as key to whether the Fed will raise rates again in December.