Will Recovery Leave the Dollar Behind?

By: JON PRIOR
September 15, 2009 12:27 PM CST

After beating up on the brokers, let’s give them a rest and bash the greenbacks!

Well, a report from Credit Suisse may do that for us. When the firm sat down with Giles Keating, the head of Credit Suisse Global Economics and Strategy Group, he noted that the dollar would be the first victim of the global economy’s recovery.

So, does that mean we’re recovering? Keating thinks so, even though he states that the resurgence is starting from a very low base and that we still have lots of unused capacity and high unemployment.

He points to the investors who were left behind by the initial pick-up in the stock market and their eagerness to put their money back to work, and he notes that policy makers have signaled that they would maintain a “very expansive economic policy” that will keep interest rates low and continued fiscal spending.

But the dollar could be left behind, he says. In fact, it’s already showing a downturn.

“The dollar has seen some big downward movements over the last couple of weeks, and although we think that this won’t continue in a straight line, we do think it likely that the dollar will continue to weaken over the next six to 12 months,” Keating says.

Russia and China aren’t helping with their push for a new currency at the recent G20 hearings, and Keating points to the low interest rates, almost zero, set in the US. He says the dollar has always needed an interest rate premium greater than that in Europe in order to remain stable or rise in value.

“Another key reason is that, strangely, as financial conditions get less risky and become more stable, people tend to move out of the dollar,” Keating says. “Moreover, a lot of people put money into the dollar during the crisis, and now they have too many dollars.”

Write to Jon Prior.