The Economist put the dollar on its cover this week. The Economist’s cover is usually a lagging, not a leading, indicator: it signals that the dollar already has fallen significantly, and sometimes indicates that it is poised for a rebound.
Perhaps more importantly, a long-standing dollar bear – Goldman’s Jim O’Neill – now expects that dollar to rebound against the euro. Bo Nielsen of Bloomberg reports:
"It's fallen a long, long way … I personally think that a year from today the dollar will be quite a bit stronger."
Morgan Stanley’s Stephen Jen presumably has a similar view — Morgan Stanley’s forecast for the dollar at the end 2008 is 1.35.
And – as Felix hints – I am also starting to wonder if the dollar has already fallen by as much as it is going to fall against the euro.
I have long believed that a fall in the dollar’s real value was a necessary part of a broader adjustment needed to bring the United States’ trade deficit – and the United States need for external financing — down. And I have long argued that unprecedented intervention to support the dollar (in order to keep other currencies from rising) by the world’s central banks has impeded this correction, storing up problems for the future.
Those basic views haven’t changed. But it also hard to deny that the dollar already has moved substantially against the euro. At 1.45-1.50, the US trade deficit with Europe should fall quite quickly, especially if Europe continues to grow even as the US slows. The US bilateral balance with Europe has already started to improve in a rather big way.