The Bank Credit Analyst this week echoed demonstrable market sentiment, and action, in calling down the dollar. While the US dollar is becoming oversold and a short-term retracement is possible, stated analysts at BCA Research, we believe that the cyclical decline has further to run.The dollar's performance cannot, as such, be measured against the dollar itself, but the dollar index - using dollar performance against the euro, yen, British pound, Canadian dollar and Swedish krona - has until recent months been in something of a bull market, from around the start of the second quarter of 2008.The dollar index reached a cyclical high early in 2002, after a multi-year bull market, and swaggered through years of a bear market, assisting the boost for commodities, during the so-called commodity supercycle. The dollar index rallied substantially from its April 22  2008 low of 71.33 points to as high as 89.62 points, and has since fallen sharply, with current values seen at around 80 points.DOLLAR INDEX HIGHLIGHTS

Cyclical high

120.20

31 January 2002

Cyclical low

71.33

22 April 2008

Change

-40.7%

Current

79.89

From high

-33.5%

From recent high

-10.9%

Analysts at BCA Research state that in the aftermath of the burst credit/asset bubble, US policymakers face a choice: devalue or deflate. Indeed, governments around the world are facing similar conditions and are also attempting to reflate their economies. However, US reflationary policies are the most aggressive, which places the dollar at longer-term risk. As a rule, reflationary policies increase the demand for so-called hard assets.Analysts seen the US fiscal deficit topping 14% of GDP (gross domestic product) in 2009; the Federal Reserve, the US central bank, has announced debt purchases which amount to 12.5% of GDP. What's more, recent meeting minutes released by the Federal Open Market Committee warned that the Fed is willing to increase its debt monetisation operations.

BCA Research states that there are two ways that these policies are dollar negative: first, currency debasement/higher inflation means a lower nominal exchange rate in order to keep the real exchange rate stable. Second, the Fed's efforts to suppress bond yields will impact cross-border capital flows. As the US current-account deficit is now entirely the result of the budget deficit, foreign purchases of Treasuries is the most important flow for the dollar.Treasuries, or US government bonds, remain on the shopping list for many governments around the world, not least China, which now holds the world's biggest pool of foreign reserves, at $2trn. China's currency, the yuan, is largely fixed to the dollar. A weaker dollar would boost both US and Chinese exports.For BCA Research, the bottom line is that the continuation of current US policies could eventually raise investor concerns of a dollar debasement. While some short-term technical indicators are warning that the US dollar is becoming oversold, our Foreign Exchange Strategy service recommends investors hold core short dollar positions.Part of the flip side of a weakening dollar is that most commodities become more affordable in other currencies. So-called commodity currencies tend to respond positively, hurting domestic currency receipts in the relevant countries. Seen over the past 12 months or so, a good number of commodity currencies top the list of outperformers against the dollar, led by the rand, and followed by Australian dollar, New Zealand dollar, Brazilian real and Canadian dollar.

SELECTED CURRENCIES

From

From

high*

low*

Dollar DXY index USD

79.89300

-10.9%

12.0%

 

USD/unit

 

 

Unit/USD

South African rand ZAR

0.12622

-9.3%

49.8%

7.92

Indonesian rupiah IDR

0.00010

-12.0%

26.3%

10295.00

Australian dollar AUD

0.79517

-19.3%

32.3%

1.26

New Zealand dollar NZD

0.63260

-19.8%

29.2%

1.58

Brazilian real BRL

0.49938

-22.4%

30.8%

2.00

Canadian dollar CAD

0.90712

-10.5%

18.5%

1.10

Moroccan dirham MAD

0.12477

-4.1%

12.0%

8.01

Swiss franc CHF

0.92915

-7.0%

14.3%

1.08

South Korean won KRW

0.00080

-20.7%

27.3%

1255.25

Chilean peso CLP

0.00177

-15.2%

21.8%

563.85

Japanese yen JPY

0.01042

-9.2%

15.4%

95.92

Danish krone DKK

0.18898

-12.1%

14.3%

5.29

Slovenian tolar SIT

0.00587

-12.2%

14.1%

170.29

Euro EUR

1.40700

-12.3%

14.1%

0.71

Bulgarian lev BGN

0.71927

-12.4%

14.1%

1.39

Chinese yuan CNY

0.14643

-0.3%

1.7%

6.83

Singapore dollar SGD

0.69271

-6.8%

7.9%

1.44

Swedish krona SEK

0.13209

-22.1%

23.3%

7.57

Hong Kong dollar HKD

0.12901

0.0%

0.9%

7.75

Peruvian sol PEN

0.33253

-8.1%

8.6%

3.01

Taiwan dollar TWD

0.03065

-7.5%

8.1%

32.63

Venezuelan bolivar VEB**

0.00047

0.0%

0.0%

2147.30

Jordanian dinar JOD

1.41293

-1.1%

0.7%

0.71

Saudi Arabian riyal SAR

0.26666

-1.0%

0.7%

3.75

UAE dirham AED

0.27229

-0.7%

0.2%

3.67

British pound GBP

1.61180

-20.0%

19.4%

0.62

Thai baht THB

0.02913

-6.9%

6.1%

34.33

Czech koruna CZK

0.05247

-24.5%

23.7%

19.06

Indian rupee INR

0.02117

-11.5%

10.4%

47.25

Malaysian ringgit MYR

0.28616

-8.1%

6.9%

3.49

Iran rial IRR

0.00010

-6.2%

5.1%

9740.50

Hungarian forint HUF

0.00499

-28.5%

26.2%

200.36

Philippine peso PHP

0.02111

-8.3%

5.9%

47.38

Egyptian pound EGP

0.17835

-6.2%

1.8%

5.61

Colombian peso COP

0.00046

-24.7%

19.9%

2175.55

Kuwaiti dinar KWD

3.46620

-8.4%

3.1%

0.29

Norwegian krone NOK

0.15755

-21.1%

15.2%

6.35

Mexican peso MXN

0.07608

-25.0%

18.6%

13.14

Turkish lira TRY

0.64918

-25.4%

18.4%

1.54

Russian ruble RUB

0.03235

-25.4%

18.3%

30.91

Albanian lek ALL

0.01058

-19.2%

10.1%

94.50

Israeli shekel ILS

0.25510

-18.3%

9.1%

3.92

Romanian leu RON

0.33661

-25.6%

16.2%

2.97

Ukrainian hryvnia UAH

0.13115

-40.8%

28.3%

7.63

Polish zloty PLN

0.31504

-36.4%

23.3%

3.17

Pakistani rupee PKR

0.01234

-17.9%

3.5%

81.02

Nigerian naira NGN

0.00676

-20.5%

5.6%

148.00

Argentine peso ARS

0.26749

-19.5%

0.2%

3.74

Kazakhstan tenge KZT

0.00665

-20.6%

0.7%

150.44

Iceland krone ISK

0.00807

-40.5%

20.2%

123.95

* 12-month

** Some currencies are tied, or fixed, to the USD.