US Dollar Bear-Market Rally Targets Reached
by Bob Bronson, Bronson Capital Markets Research. May 11, 2004

We expect the three-month US dollar rally has done both its fundamental and technical (ABC-zigzag pattern anticipated previously) job so that its two-plus-year-old bear market will very likely resume shortly.

The last time it took a 33% decline (blue dashed line in the chart below) in the "US real effective exchange rate" to start, with a two-year lag, the four-year correction in the then 3.5% current account deficit (red dashed line).

This time, while the two-year lead is now in, we expect it will proportionally take a 50% decline to fully correct the latest 5% current account deficit.

Shorter term, we expect the US dollar is now ending its bear market rally primarily because the real interest rate differentials with the Euro and other US trading partner currencies is being fully discounted by forex traders. Follow-on reaction to tomorrow's international trade report should confirm this, as well as the precious metals which we now rate as a buy again, especially on any further weakness testing their recent lows.

And longer term, we fully expect both: (a) the uncorrected purchasing power parity problem of overpriced American labor will be also corrected with continued labor arbitrage outsourcing and (b) foreign central banks will rebalance their at least doubly-over-owned portfolio asset allocation in US Treasuries – but only very slowly from new trade surplus cash flows.

We do not expect such progressively incremental foreign central bank reallocations to cause higher US Treasury interest rates, notwithstanding any Chinese yuan revaluation.

http://www.oecd.org/dataoecd/45/50/20428201.pdf (page 13)

© 2004 Bob Bronson

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Bob Bronson | Bronson Capital Markets Research | Email