Bull & Bear's Currencies

     Dr. Hans Black: "The New Year started with a sharp rally in the dollar versus European currencies. After the near-unanimity of opinion against the dollar in late 2004, a certain doubt has now set in: is this the beginning of a new trend or merely a pause? The euro, which has been pushed back below 1.30 from almost 1.37 near year-end, has arrived at a critical juncture. Our sense is that the euro will decline somewhat further in the weeks ahead, possibly toward 1.24 - 1.26, before any important rallies can commence again. Critical for now will be what happens with interest rates; out best guess is that the Fed will continue to raise rates while the European Central Bank does nothing. We expect the dollar to continue gaining strength in 2005 and eventually to trade closer to 1.10-1.15. Equally, we expect the Swiss franc to weaken further and enter the 1.35-1.40 price range later in 2005.
     Great controversy continues to surround the Japanese yen. Many colleagues in the investment business are expecting an upward revaluation in the Chinese and, eventually, other Asian currencies, but we beg to differ. Should the Chinese really change the band or basket against which their currency now trades, it will likely signal a bigger change for Asian currencies - down, not up. And should the Chinese continue to do nothing (which is quite likely), we foresee the classic problem of over-capacity and financial strains now evident in China leading these currencies lower. Why, then, is the yen not trading considerably lower? The deficit remains out of control and the current debt has taken on proportions never seen by any major industrial country in the last century. We remain convinced the yen will weaken, perhaps much faster than we expect.
     The Canadian dollar has also responded to the force of gravity (and economic common sense), weakening considerably in January. The loonie, it seems, is at a similar crossroads to the European currencies: after some peaks, the trend will be down. With over-capacity problems in many countries and raw material prices once again coming off, we do not see the fundamental argument for a stronger Canadian dollar. Indeed, what we are seeing are the lag effects of a stronger Canadian dollar in both 2003 and 2004 now hitting the economy; hence, the subtle changes in the statements of both the Bank of Canada and of the current government. After trading in the 1.23-1.25 zone for a while, we see the Canadian dollar weaken to 1.30 and quite possibly to the 1.35 zone later this year.
     For now, both the Australian and New Zealand dollars have held on to their high ground, but it is only a matter of time before investors question whether these currencies should be priced at the top of their ten-year range. The answer will be forthcoming later this year and we continue to expect both these currencies to trade substantially lower. Our target remains .64-.68 for the Australian dollar and .58-.62 for the New Zealand dollar."