DEJA VU-2004

For those who’ve been around the currency markets for some time, the current dollar collapse may bear a striking resemblance to the reserve currency’s tumble seen not so long ago!

As the saying goes, History is a good teacher ‘coz unless you learn its lessons well when taught the first time …………it would repeat itself until you did!

Flash-Back to 2004……………...

The US was infact just coming out of a 1 year hiatus period after a series of rate cuts -courtesy The Fed, from 6.5% to 1% between 2000 and 2003.The theme, of course was quite different – it was the DOT Com bubble which popped numerically on March 10, 2000 when the NASDAQ Composite index peaked at 5,048.62 more than double its value just a year before.

June ‘04 witnessed a significant shift in monetary policy – a steady course of 25 bps hike to the benchmark rate that was to follow for the next 2 years.

And as the year progressed to encounter the verdict on the next Presidential vote, the dollar went on a tailspin, seemingly into a bottomless pit…… Almost every other news clip and financial journal had something to say on the dollar’s fate. Not to forget investors and financial experts across the globe railing and ranting over what seemed to be a possible “DEATH” for the dollar. Analysts and currency strategists were no exception, calling for a one-sided decline in the reserve currency right into the whole of 2005. Infact you would have risked being called a full-fledged fool if you’d even thought of being a dollar bull………

…………..and what was interesting in this entire episode was that the euro and sterling went galloping to new highs with each passing day, despite a slew of negative economic data being released from the respective regions.

And as everyone knows today, 2005 is recorded as a year which saw probably one of the best bull runs for the greenback.

So what lessons do we take home as we step back into the current reality of 2008………..A year that just witnessed a series of aggressive rate cuts by the Fed - the problem though was the housing bubble burst and the resultant Sub Prime crises. But then again, we have the 56th Presidential elections around the corner AND the dollar plunging to new lows, this time particularly against the commodity currencies apart from the euro. Take a closer look at the UK and Euro Zone data and you will find that there is virtually nothing to cheer about these economies from a growth perspective.

So if History has taught the right lessons we may have some very valuable pointers going forward. We could probably see the dollar being driven down further in the run up to the elections which would be the final leg of the fall, effectively paving the way for the next course of rally to maybe a 1.45 to a euro and 1.83 to a pound in 2009.Commodites is most likely to follow suit as a massive unwinding is likely to set in 2009 after an immediate final rally.

WELL Worth the Flashback…..huh?? .......Well,that’s again for time to tell!