Why the Dollar Is Tanking as Cairo Burns

Protesters firebombed in CairoWhen a world crisis erupts, such as the current fighting in Egypt, investors usually flee to safety. Historically, that has meant piling into the U.S. dollar. But a funny thing happened when protesters took to the streets of Cairo: The dollar tanked.

The dollar has fallen 5.5% since its recent peaked on Jan. 10, though it regained a little bit of ground Wednesday. What's causing the retreat?

Turns out, the answer is more likely found in Europe than in the Middle East.

Kathy Lien, author of The Little Book of Currency Trading, says investors are looking at inflation expectations in Europe, which are much higher than in the U.S., and they believe "central banks may raise interest rates this year."

"Inflation expectations and the countries that are most vulnerable to inflation pressures are the ones seeing their currencies rise the most," Lien says. "The U.S. dollar is being sold across the board because the Federal Reserve told us last week that inflation is still trending downwards."

German Bonds Get More Attractive


Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, says it's not only interest rates that affect the exchange rate, but interest rate differentials.

As an example, Chandler notes that in early January, the two-year U.S. Treasury bond had a yield 20 basis points below the yield on a two-year German bond. Today, that differential has widened to 80 basis points, making the German bond more attractive because it uses the euro.

The European statistical agency reported Monday that prices in the eurozone had risen 2.4% in the last year, well above the European Central Bank's target of 2%. The bank hasn't indicated that it's about to raise interest rates, though the markets seem to have priced in an interest rate increase.

"A Dangerous Game"

Even worse than the eurozone is what's happening in Britain. U.K. inflation estimates are up to 3.5%, and the pound has risen sharply against the dollar, even though the country had 0.5% contraction in fourth-quarter GDP.

"The U.K. is playing a dangerous game," Lien says. "Not only is inflation above the target, but it's above the comfort zone of 3%. It could get to 4% to 4.5%. They have this bizarre belief it's just going to go away."

Chandler says another factor boosting the euro is that European debt crisis fears appear to have eased. For months, investors have been concerned that countries like Greece, Spain and Portugal might be unable to pay their debts, and were considering a default. In response, the European Union and the International Monetary fund set up a temporary fund to help weaker countries borrow, and a permanent larger fund is now being considered.

"We've had a huge debt market rally in Europe in the last week as people became more convinced that European officials will come up with a larger comprehensive plan," Chandler says.

The New Carry Trade

The result is the so-called carry trade has been reinstituted. The term used to apply to many small investors in Japan who would borrow yen at less than 1% and buy Australian bonds paying 8%. Now, that trade has been replaced by speculators borrowing dollars for less than 1% and buying high-yielding emerging-market currencies like the Brazilian real, which currently yields 10.75%.

This time around for the dollar, what's happening in Europe economically is outweighing what's happening in the Middle East politically.

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Dereck

Major Fraud Alert


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May 29 2011 at 1:34 AM Report abuse rate up rate down Reply
Frank Van Delden

Usually stupid people which rush to change cries loudest. Obama or anybody in the current President seat will do a Staying Alive Dance. Let see how much the GOP can hurt AMERICA? ? ?

February 04 2011 at 12:20 PM Report abuse rate up rate down Reply
pdbliz

IF OBAMAS HEALTH CARE IS SO DARN GOOD FOR YOU,,,WHY HAS THE GOVERMENT GAVE OVER 700 WAVERS TO NOT TAKE THE HEALTH CARE,,,,MAINLY TO UNONS......WHO GAVE OBAMA MILLIONS AT ELECTION TIME,,,
OBAMA HAS BEEN ONE OF THE MOST CROOKED MEN IN THE WHITE HOUSE...AND,,THERE HAVE BEEN MANY....

February 04 2011 at 8:28 AM Report abuse -1 rate up rate down Reply
pdbliz

PEOPLE,,,HAVE YOU NOT LEARNED,,,OBAMA AND THIS THUGGS,,,DO NOT CARE ABOUT AMERICA,,,,IT IS ABOUT BRINGING AMERIVA DOWN TO ITS KNEES,,,,
LAUGH ALL YOU WANT,,,,,,,IT IS TRUE,,,,,,85% OF HIS CABINET ARE 100% THUGGS AGAINST AMERICA....
....IF THE PEOPLE DO NOT WAKE UP,,,STAND UP ,,,,YOUR FREEDOM AS YOU ONCE KNEW IT,,,WILL BE OVER....
LOOK WHAT THE GOVERMENT HAS TAKEN OVER IN ONLY 2 YEARS OF OBAMAS TERM,,,,.
DESTROYING WHAT AMERICA STANDS FOR,,,FREEDOM,,,,,,,YOU WILL SOON HAVE GOVERMENT INSURANCE OR PAY A FINE.......YOU MAY HAVE TO DRIVE A GOVERMENT CAR,,,,YOU BANK AT A GOVERMENT OWNED BANK,,,,ON AND ON,,,,,,,
,,,WAKE UP AMERICA BEFORE IT IS TOO LATE............
..

February 04 2011 at 8:24 AM Report abuse rate up rate down Reply
centrline

http://insideinformationdaily.com/. There are no political parties, just politicians.

February 04 2011 at 5:18 AM Report abuse rate up rate down Reply
Robert & Lisa

Our socialist public educational system has indoctrinated our children into believing capitalism and freedom is bad and socialism is good. If Socialism is so good, why does the long time socialist government of Mexico boast of being the #1 producer of silver, plenty of oil, and the richest man in the world, yet 99% of their people are in the poverty level making an average of less than 6 dollars a day. Corruption is rampant. The evil, ultra rich see Mexico and want to implement socialism here, where they can have all of the wealth and power and the middle class will now be among the poor. That is what their Demoncrat puppets in the white house and senate are doing to us.

February 04 2011 at 3:13 AM Report abuse +2 rate up rate down Reply
2 replies to Robert & Lisa's comment
gsports97

It always amazes me to see the right wing propaganda spit they throw out. The ultra rich in america are repubilicans and there the ones who want all the weath and want to destroy the middle class and poor. Nice try, nexted time just say you a paid propaganda agent of the republican party before you rant away.

February 04 2011 at 4:46 AM Report abuse -2 rate up rate down Reply
icemanbill23

gsports97..."the ultra rich in America are Republicans". Really?..I think you drank some of that liberal Kool-aid!

February 05 2011 at 4:13 PM Report abuse rate up rate down Reply
jj21904

Gee, I wounder why the dollar tanked? LMAO

February 04 2011 at 2:27 AM Report abuse +3 rate up rate down Reply
cartra

OF COURSE, ITS NOT THE FEDS CURRENCY PRINTING PRESSES HELPING TO CAUSE IT! LOL

February 04 2011 at 1:27 AM Report abuse +5 rate up rate down Reply
bfpowersjr

Mr. Wallace: For a longer view of the price action of the dollar go to www.bigcharts.com: Enter UUP (dollar)... advanced chart... all data... daily... "indicators" moving average... SMA (simple moving average (3-line)) 60... "draw chart". The dollar has rallied at this point in the past, but appears weak. The 60-day moving average line shows some bullishness, but the 120 and 180 day moving average lines are still bearish.

February 04 2011 at 12:24 AM Report abuse rate up rate down Reply
shorthosep

What are you people ---- retarded. If the U S dollar goes down who benefits? #1 ---BLUE COLLAR WORKERS!!!!!! If the dollar goes down it's CHEAPER for foreign companies to buy U S goods. Companies like Boeing will sell more planes because the cost is cheaper. Foreign goods (imports) will go UP!!! Maybe we'll all return to made in America. #2 Farmers benefit--- again cost goes down opening markets to sell to foreign companies. #3 Hotels go up-- It costs less for foreigners to come here and travel and leave their money. #1 losers PEOPLE WHO BUY FROM FOREIGN COUNTRIES!!! It costs more. #2 loser-- American Banks people invest their money where interest rates will rise higher. So if your against American jobs and listen to the GOP talking heads then yes you want the dollar to rise if you love your country you may need to find a job your happy the dollar is lower!!!!!

February 04 2011 at 12:16 AM Report abuse rate up rate down Reply
2 replies to shorthosep's comment
Bill

Shorthosep, What "U. S. goods" other than Boeing aircraft and Carterpiller equipment are you talking about? America is now a consumer economy, not a producer economy. That's one reason government efforts to spend the economy back to life fail: the money the government pours into circulation are spent on foreign- made goods! That is a large part of why China appears to be doing well right now.

As to agricultue, you are missing a key point: commodities (like wheat, pork bellies, soy beans, etc) are priced in dollars. So if the value of the dollar goes down, the cost of the commodity goes up! That is exactly what is happening now, and a cause of the unrest in the middle east.

Oh, and get off the blame game: both parties are guilty.

February 04 2011 at 1:02 AM Report abuse +4 rate up rate down Reply
Robert & Lisa

The weaker dollar means a lower standard of living for you and your union buddies. Bring it on.

February 04 2011 at 3:15 AM Report abuse +2 rate up rate down Reply