Dollar Strength Versus Euro May Undermine Obama's Export Goal, Mizuho Says
The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, climbed almost 9 percent this year as Europe’s financial crisis boosted demand for the refuge of U.S. Treasuries. The flight to safety may continue, strengthening the dollar to a more-than-seven-year high of $1.05 per euro in the third quarter of 2011, said Daisuke Karakama, a market economist in Tokyo at Mizuho.
“The U.S. government’s wholehearted desire is probably to raise export growth and employment” before midterm elections in November, Karakama said. However, the dollar will strengthen against the euro as “austerity measures due to the European crisis depress the region’s economic growth and keep interest rates there low.”
Obama’s export goal, outlined in his State of the Union address this year, also faces challenges because China is likely to limit gains in the yuan against the dollar at an annual rate of about 3 percent, according to Karakama. Obama this week reiterated his desire for a stronger yuan, days after citing “headwinds” from the European crisis.
China’s central bank has allowed the currency to gain 0.8 percent since saying on June 19 that it was resuming a flexible exchange rate to curb inflation and rebalance the economy away from exports. The currency is allowed to trade 0.5 percent on either side of the daily fixing.
“The U.S. won’t be able to make a breakthrough toward a weaker dollar,” Karakama said.
The euro fell to $1.1877 on June 7, the weakest since March 2006. It traded at $1.2490 at 2:58 p.m. in Tokyo, from $1.2527 yesterday.