The capture of Saddam Hussein is a psychological plus for the beleaguered dollar, but the likely impact will be just a short-term boost in value as the overhang of trade deficits and low interest rates still exist.
News of Saddam being pulled, bewildered and disheveled from a dirt-dug pit by U.S. forces after eight months on the run, will be first reflected in the financial markets when Asian opens for business on Monday Dec. 15.
Analysts say the dollar won’t see a big benefit from the capture because investors have had several hours to digest the news, and the fact it does little to reduce the fundamental economic reasons lined up against the greenback.
“This is a short-term positive for the dollar, but it doesn’t necessarily remove any of the medium-term concerns such as the trade and current account deficits,” said Robert Sinche, global head of foreign-exchange strategy at Citibank in New York.
“Also, (Saddam’s capture) has not really done anything, or likely to do anything, to change materially Fed policy, which we also think has weighed on the dollar,” he said, adding Citibank maintains a one-market target for the euro of $1.20.
In very illiquid trade at 1904 GMT, the euro stood 1 percent lower at $1.2165, according to Reuters data from late Friday New York trade of $1.2287. The euro is just below Friday’s record high of $1.2306.
The United States is still saddled with a current account deficit of roughly 5 percent of gross domestic product, which means more dollars leave the United States than enter and a loose interest-rate policy that gives little incentive for non-Americans to purchase U.S. bonds and stocks.
Last week, the Fed left a key U.S. interest rate unchanged at a 45-year low of 1 percent and signaled it is not about to raise rates any time soon. This compares to interest rates in the euro zone of 2 percent, 3.75 percent in the UK, and 5.25 percent in Australia.
“If this had happened in the middle of the trading day, then certainly it would trigger some dollar appreciation, but the news alone, given there is a lag to digest it, means the impact will be limited,” said Daniel Tenengauzer, currency strategist at Lehman Brothers in New York.
The dollar stood at 108.15 yen, up 0.40 percent from late Friday’s New York trade, according to Reuters data.
Since early November, the dollar selling has persisted despite a raft of positive U.S. economic data. The euro alone has risen more than 9 cents in value against the dollar in the last five weeks -- accounting for about half of the euro’s rise so far this year against the dollar.
Analysts say speculative investors continue to line up against the greenback by selling it in the futures market to near record-high short positions. A short position in the dollar is a bet it will continue to fall in value.
According to Citibank’s Sinche, in the latest week of data, the aggregate speculative short-dollar position rose to roughly $18.8 billion, a record since the euro’s introduction in 1999.
Historically, when the currency futures market position reaches extreme levels, as in this case, there is scope for a short-term reversal in the dollar’s value.
“Certainly, if there were one position that would inflict the greatest pain across the markets it would be a rebound in the dollar,” Sinche said.
“The dollar had moved pretty much in a straight line from November, and you wondered what would put that to an end. Well, this news about Hussein is it,” Sinche said.
Tenengauzer said that in addition to Saddam’s capture being a positive move for the dollar, the failure on Saturday by the European Union to agree on a first constitution for the expanding bloc would give some benefit to the greenback.
The EU was plunged into a crisis on Saturday by a fundamental split over member states’ voting powers. Spain and Poland blocked plans to give bigger countries, led by Germany and France, more voting power in a reformed system that would take greater account of population size.
“Monday will be a good day for the dollar for these reasons,” Tenengauzer said. “But our fundamental view is still dollar bearish because of the imbalances in the U.S. economy, such as the current account deficit.”