Is the Dollar Ready To Rise? Strategists See Reason to Hope
Its Weakness Has Been So Extreme That a Rebound Could Be Coming

By Tim Paradis
Associated Press
Sunday, May 11, 2008; F10

With higher prices at the gas pump and the grocery store, consumers might not be looking favorably at the dollar -- one of the reasons for the recent run-up in commodity prices. But for investors, bad feelings about the dollar could dissipate if it shows greater strength.

While currency investments are volatile and meant for only a small portion of an average investor's holdings, they can act as ballast for a portfolio by moving independently of stocks and bonds. With the dollar swooning, some currency investments have lately seemed fit only for the bravest of investors. But now some investors are wondering if currencies might be in for another shift.

The Federal Reserve's recent decision to lower a key interest rate by a quarter point, on its face, wouldn't seem likely to help the anemic dollar. That's because investors from around the world are more likely to look for higher yields elsewhere with each cut the Fed makes. So places such as Europe, where interest rates are higher, draw investors away from the United States. But some economists have written that the Fed is likely to sit on its hands in future meetings and leave rates unchanged.

So with U.S. interest rates perhaps near a turning point, investors with currency holdings might want to reevaluate their portfolios to see whether it's time to tweak any of their positions.

Bruce McCain, head of the investment strategy team at Key Private Bank in Cleveland, noted that the precipitous decline in the dollar could mean it's due for a rebound. He said short-term speculation has probably muscled the dollar lower than it deserves to go.

"Markets often go to an extreme before they reverse," he noted.

McCain also contends that economies outside the United States are showing signs of slowing, which could prompt central banks elsewhere to trim rates in hopes of boosting economic growth.

"I think, in particular, we hear very little discussion of how the foreign economies are behaving. We see more signs of weakness there than it seems to me are currently being picked up by the experts here in the United States."

While a change in the direction of the dollar could occur, investors would still probably have to endure volatility.

Ryan Caldwell, co-portfolio manager of the Ivy Asset Strategy fund, contends that investors could know in a matter of weeks whether the dollar is poised for a sizable rebound. But the fund isn't taking any chances -- it has about one-third of its investments in non-dollar-denominated assets.

Caldwell said data on the housing market and other parts of the economy due in the coming weeks could determine whether the Fed will be able to hold off on further rate cuts.

"What we've been doing is in a way straddling the fence," he said of the fund's strategy. "We have a fairly marked position in equities. Those are largely focused on global growth. We have the flexibility to be really in any domestic market."

He also cautioned that the Fed may not pause in its string of rate cuts, as some investors are predicting.

"If the market comes to the conclusion that the economy continues to soften and the Fed is not done, we think the dollar is going to take another hit," he said.

But if the U.S. economy shows signs that it might be on the mend, the dollar could reclaim some of the ground lost in recent months, he said.

"If we firm up here, then what we'd see is the dollar firming up the against the euro and probably the pound."

But while a rebound in the dollar could be welcomed by investors, consumers might have to wait longer to see the effects of any strengthening.

Sazia Syed, an accounting student, said she doesn't invest in currencies but nonetheless remains frustrated with the dollar. She said moderate gains in the currency haven't seemed to make a dent in food prices.

"When I go to the grocery store, it still costs more than it used to," she said, noting that some costs, such as that of rice, have surged. "You cannot buy less of the important stuff. You just have to go with the flow."