One on One with Ashraf Laidi, Chief Currency Analyst with CMC Markets
Monday, December 18, 2006
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SUSIE GHARIB: The U.S. dollar fell slightly today against the euro and the Japanese yen on news that the U.S. trade deficit widened to a record in the last quarter and that American homebuilders are a bit more pessimistic about the housing market. This year the U.S. dollar is down more than 10.5 percent against the euro and down 13 percent against the yen. Joining us now with some analysis and the outlook, Ashraf Laidi, chief currency analyst with CMC markets. Hi Ashraf.
ASHRAF LAIDI, CHIEF CURRENCY ANALYST, CMC MARKETS: Hello.
GHARIB: What would you say is the key factor that is weighing down the dollar these days?
LAIDI: Well, the main factor is that the level of growth in the euro zone and in the UK is growing actually faster than that of the U.S. in the third quarter and expected to do so in the first quarter so that's something we have not seen in five or six years. But something that we have not seen since the life of the euro, since 1999 is actually the central banks in the euro zone and in the UK are in the midst of raising interest rates while the United States, while the Fed is expected to cut rates in the short term. This divergence in interest rates has not been seen and that's what's really weighing on the U.S. dollar. And of course with that comes a divergent level of growth. And also one more thing, is that the central banks of Asia and the belt (ph) countries are considering accumulating alternatives more asset reserves as alternatives to the U.S. dollar.
GHARIB: So let's talk a little bit more about that. If this trend continues especially what you are talking about with the Federal Reserve, everybody believes that the Federal Reserve at some point will cut interest rates next year. If that does indeed happen, will we see a run on the dollar?
LAIDI: I do not think we're going to see a run on the dollar because a run on the dollar would entail a fast rise in the currencies of Europe and of Japan. And these economies as they are now in the midst of an economic recovery, they really cannot afford to kill off that recovery due to (AUDIO GAP) in their currencies which could weigh on exports. So I think that we could see further declines in the long-term in the U.S. dollar that are interrupted by, you know, a short-term bout of dollar increases like we have seen in the past two weeks.
GHARIB: So what does all of this mean for the stock market? What does this mean for corporate earnings? Is a decline bad for corporate America and for the stock market?
LAIDI: It is good to the extent that look, with the S&P, with the S&P terms at 25 percent of their earnings come from abroad, so therefore they do gain from a weak dollar. And that's what U.S. investors gain from. And I think that, come Q1, you're going to hear more about the term of organic growth, that is level of earnings excluding the foreign exchange effect which is a positive. It would be a negative if the decline in the U.S. dollar is so fast to the extent that it reduces the attraction to U.S. dollar in holding U.S. dollar by foreign investors. That is when we would have a danger. But we are unlikely to see that.
GHARIB: All right, thank you so much for your analysis. We appreciate it Ashraf.
LAIDI: Thank you.
GHARIB: We've been speaking with Ashraf Laidi, chief currency analyst with CMC Markets.
