Tuesday, October 02, 2007

Value of the Dollar in 1 Year? Check Forward Rates

What's going to happen to the U.S. dollar over the next year? Stronger, weaker? The best place to find out is in the forward markets for foreign exchange, where the dollar is already trading against the currencies of about 30 countries for delivery one year from now.

According to yesterday's
one-year currency forward rates, the dollar is expected to continue depreciate over the next year, and is trading at a one-year forward discount, against 11 major currencies like the euro, Swiss franc, yen, Canadian dollar, etc. (see chart above, click to enlarge). The USD is expected to appreciate over the next year, and is already trading at a one-year forward premium against 18 currencies including the UK pound, Mexican peso, Indian rupee, etc.

Bottom Line: The fall of the USD has probably stabilized and will actually appreciate over the next year against some currencies like the UK pound, and will depreciate only mildly against many other currencies.


At 10/02/2007 10:09 AM, Anonymous Anonymous said...

You might find that forward rates are a poor predictor of future spot FX rates. Just something to consider.

At 10/03/2007 12:03 PM, Blogger happyjuggler0 said...

Forex futures are determined by arbitraging the difference between interest rates in different countries so as to not leave $100 bills lying around on the ground. Otherwise you could borrow short term, transfer your currency from x to y, and do the reverse in the futures market. Thus forex futures don't even pretend to predict future currency values.


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