Dollar Weakens in 2006

Chart of the Week for May 12-18, 2006

Last year, the US dollar rallied, particularly towards year end, as shown by the Chart of the Week from late November 2005. At that time, overseas investors favored US assets, and the dollar reached a two-year high against the Euro and Yen. However, since then, the pattern has reversed. The dollar has begun to decline versus several currencies so that it takes more USD to buy one unit of a foreign currency as shown above. Several causes for this have been cited: the Group of Seven leading industrial countries recently expressed concern about global imbalances, including the U.S. trade deficit; a weaker dollar would help achieve equilibrium. Also, some analysts feel the Fed will stop its string of interest rate hikes.

On a positive note, as the dollar falls, international investments become more favorable for U.S. investors. A weak dollar makes foreign currency returns worth more. Investment flows have begun moving into local currency debt in emerging markets. Also, international and emerging market stocks have performed well recently, and the returns are boosted when repatriated.

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