Currencies: A View from Everbank

11/19/2004 12:00 am EST


Chuck Butler

President, EverBank World Markets

Currencies were once only discussed by the most sophisticated investors. But they are becoming an increasingly important topic to all investors. We turn to currency expert Chuck Butler of EverBank for a current overview of these increasingly important markets.

"Let it snow, let it snow, let it snow," quips Chuck Butler, president of EverBank World Markets, in his newsletter, The Daily Pfenning. "John Snow, US Treasury Secretary, has turned the green light on once again for dollar selling. When asked if he would support an agreement with the Europeans to manage the pace of the dollar's decline, he said, 'The history of efforts to impose non-market valuations on currencies is at best unrewarding and checkered...' This is big folks. John Snow has signaled to the markets that there is no floor on the dollar. Green means 'go,' and the green light for a weaker US dollar has been turned on.

"Meanwhile, Bill Gross of PIMCO was recently interviewed about the dollar, and specifically the Canadian dollar or loonie, and said, 'Over the long-term, the inevitable direction for the US dollar is down.' That's what I've been telling people for over a year now. European and Japanese officials want the dollar weakness to slow down. Eurozone officials weren't that upset with a rising euro as long as oil was trading at $50 per barrel. But now that it has backed off, which in my opinion is just temporary, they can't deal with a strong euro. And Japan? Well, that's got to be a bee in the Bank of Japan's bonnet. Unless they want to go back to the intervention table and spend trillions of yen on a falling currency, their quiver is out of arrows! Instead, the ECB and the Bank of Japan would prefer to have the US join them and do some co-coordinated intervention. But that's not going to happen, as John Snow pretty much told them.

"Overall, I am of the opinion that the steps to higher euro levels will take their time, and slowly move in that direction. In fact, we could see a sell-off in euros to clean out old stale long positions. But that's not going to be the end of the trend, so use any sell-off as an opportunity to buy euros on a dip. Meanwhile, foreign inflows to Japanese equities have persisted, even as the Japanese stock market has under-performed other major markets since March, which leads me to believe that yen is not overbought and flow trends are biased toward further yen strength. As such, I remain bullish on yen. Japan has run its largest current account surplus on record, and probably most important of all is the fact that Japanese competitiveness is not being threatened by the stronger yen. I don't see the Bank of Japan intervening one yen, until this currency begins to get overstretched. And we're a long way from that.

"Meanwhile, there are big rumors going around that Russia is contemplating abolishing their current system of currency pegging. This has also brought out the old rumor that Russia is going to price their oil contracts in euros. We’d note that about 65% of Russia's total trade flows are with the Eurozone, so changing their currency basket to reflect that would probably make sense... And if Russia were to take that newly formed basket and mirror their foreign currency reserves (which would make sense), the Russian Central Bank could potentially increase their reserve allocation of euros from 25% to 65%. Indeed, this is a rumor that could have some legs.

"Further, with about 65% of Russia's total trade flows going to the Eurozone, I am led to believe they could change their oil contracts to euros, since that's the destination of most of that oil. These changes would not be good things for the dollar, folks. It could send it to levels not even talked about by me in the past. We'll have to keep an eye on these rumors. I think I smell smoke, and where's there's smoke, there's likely to be fire. Another rumor going around is that the US Congress may even abolish the debt ceiling all-together. Talk about something that would also take a toll on the dollar!

"In general, I'm much more conservative about the dollar then most currency observers. Former US Treasury Secretary Robert Rubin has worried that foreign investors could begin to lose confidence in US investments, which could create a ‘debt maelstrom.’ Those are strong words! But for now, I believe we are seeing an interim weak dollar trend, and once China, Japan, and the rest of Asia decide to allow their currencies to get stronger versus the dollar, the deficit problem will begin to work itself out, and after a few years, all will be better. Of course, having said that, I do believe that if Asia doesn't get their collective acts together, then we could be in a real mess. Foreign investors will demand higher interest rates on their investments, inflation will rule the earth, and still the dollar will be sold. This will cause a recession in the US and have the same effect on the economies that export to the US."

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