One On One With Ashraf Laidi, Chief Currency Analyst at MG Financial Group
Tuesday, May 02, 2006
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SUSIE GHARIB: The U.S. dollar remained under pressure today, trading at 11- month lows against the euro and fresh seven-month lows against the Japanese yen. Joining us now to talk about the reasons behind the dollar`s recent decline and the outlook, Ashraf Laidi, chief currency analyst at MG Financial Group. Hi, Ashraf.
ASHRAF LAIDI, CHIEF CURRENCY ANALYST, MG FINANCIAL GROUP: Hi, Susie.
GHARIB: Why don`t you begin by telling us why the sudden drop in the dollar?
LAIDI: Well, the very element that was behind the dollar`s 15 percent slide last year, namely the interest rate hikes by the Fed, is about to come to an end. It is about to be near to come to the end, and as Ben Bernanke said last week, that the Fed could be looking into a pause and that would take away the luster, the yield luster. So, at the same time, while the Fed is expected to near the end of the two-year campaign to raise interest rates, at the same time, you have got the central banks of the rest of the world, from Canada, from the euro zone, to also Japan are expected to raise interest rates or are actually in the process of doing that. So, the dollar`s yield advantage with the rest of the world is expected to be eroded. And that`s what has taken away from its luster.
GHARIB: Now, some people say that if this Friday`s employment report is strong, that could boost the dollar. Do you agree with that?
LAIDI: Not really. Not really, because the weakness in the dollar is not only -- is not only viewed to these factors. This payroll report is actually coming right before the FOMC rate meeting that is widely expected to see a rate hike. I think a more important employment report is the one that is expected to come - is the one for May, which is coming before the June meeting, which is -- which is a toss up right now as to what the Fed is going to do. But I think if we do see a payroll number next Friday, less than let`s say 120,000 or 100,000, that could weaken the U.S. dollar. If we see a number, let`s say, above 200,000, that could give a short term upside.
GHARIB: Let me ask you this way -- what could drive a dollar rebound?
LAIDI: Basically, if we see evidence in the U.S. data that -- evidence of strength, that would lead the Federal Reserve to prolong its interest rate hikes. If the Fed, let`s say, halts this summer, and continues to raise rates again, if there is this sort of -- if the Fed unexpectedly continues to raise interest rates, that would be very good for the U.S. dollar. To a lesser chance -- let`s say China says that we are going to reduce our demand for energy and for oil, and if we see an unexpected drop in oil prices and in gold, that could also help the U.S. dollar.
GHARIB: Let me ask you this -- what impact is this weaker dollar potentially -- what impact could it have on stocks and bonds?
LAIDI: Well, you know, if there is a decline, or if there is an accelerating decline in the U.S. dollar, that will lead usually to higher interest rates, mainly, on the long end of the bond market. And that may not be very good for the housing market. We`re seeing one-year adjustable rates going to two-year highs and the weekly mortgage obligation to five- year lows. That would further steepen the U.S. yield curve and could lead to further declines in the housing markets. On the stock market, that would really help the U.S. multinationals, those that widely depend on earnings from abroad.
GHARIB: All right. Well, we`ll have to leave it there. Thank you so much for explaining this complicated topic. We appreciate it.
LAIDI: Thank you.
GHARIB: We have been speaking with Ashraf Laidi, chief currency analyst at MG Financial Group.
