Dollar still looks weak in the short-term

With unemployment still at historic highs and the state of the economy still fragile, most top economists expect Federal Reserve Chairman Ben Bernanke to announce Wednesday (November 4) afternoon that the Central Bank is keep its key interest rate at its current low point.

Central Bank members conclude their two-day policy meeting later Wednesday. Along with the announcement on interest rate policy, analysts and investors are going to watch for commentary about the board’s perception of the overall economy as well as various key sectors.

The Fed has maintained a low to no lending rate policy for banks for several months as part of an effort to reduce lending costs and to encourage home, auto and other purchasing. This policy has helped mortgage-strapped homeowners to refinance in some cases and it has helped struggling debtors with lower credit card and loan financing costs.

One effect of a lower interest rate policy is that it has helped hold down an already beat up dollar. The dollar has been in a relatively weak position on the global front for sometime, and with little interest yield, no change appears on the horizon.

The perception of dollar weakness has not been as much because speculators believe the US economy is in that much worse condition than global counterparts. It has been created more as a result of investors fleeing dollar positions for safe investments like gold, which is currently closing in on $1,100 per ounce.

As the economy has improved, another reality has been speculators jumping into oil positions. The correlation between improving oil prices (currently over $80 per barrel) and positive sentiment on the economy has been real and obvious.

Despite holding firm in recent weeks, the dollar is still under short-to-medium term pressure against the Euro, Pound, and other major currencies. One Euro is worth just shy of $1.48, and looks poised for a surge past $1.50. One British Pound fetches $1.6531 and a retest of the medium-term high over $1.70 also seems likely.

The dollar has been especially weak against the Japanese yen of late. Global perception seems to indicate that many expect the world’s second largest economy to rebound and thrive more quickly than the largest. One dollar is currently worth only 90.83 yen.

Most analysts seem to agree that a low interest rate policy is still important until the labor sector improves. American consumers and businesses need all the help they can get. However, the dollar is likely to pay the price until it is freed from the binds of no yield.

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University. He is also in house stock market commentator at Live Charts UK, where you can find real time charts and share prices.

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