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The dollar slide is not having too great an effect on markets – perhaps it is the seasonal factor, says Brian Tora

As if having US Treasury secretary John Snow deliver remarks designed to maintain downward pressure on the dollar was not enough, we now have China stepping in to the fray. When a leading daily financial newspaper interviewed Li Ruogu, deputy governor of the People’s Bank of China, it was so taken with his warning that the US should not blame other countries for its economic difficulties that it became the headline story on the front page.

Of course, the US twin deficit problem is now fully in the glare of international publicity. There is no impending presidential election to give commentators the excuse that speculation on what could happen might disrupt the political process. Even Federal Reserve chairman Alan Greenspan has reminded the administration that the current account deficit is “increasingly less tenable”. Not that markets moved. They had heard it all before.

But it is difficult to see the dollar slide reversing. As it happens, it is not having too great an impact on markets. Indeed, it is surprising that share prices are as robust as they are, given the way oil is bouncing back again and US economic difficulties remain headline news. Perhaps it is the seasonal factor. December is, after all, usually a good month for shares.

The seasonal affect on stockmarkets has often been remarked on but is probably nothing more than book balancing by professional fund managers. Most pension funds and other big institutional mandates operate to a calendar year end, so the most detailed report they will need to place before their clients is likely to be published early in the new year.

Even if a fund is operating to a different year end, there is a good chance that December 31 will be a cut-off point for a quarterly report. There is nothing like the need to address your clients to focus the mind of a fund manager. Of course, they will be mindful of what other managers have been up to. Other managers have been buying.

The window dressing that takes place can – and does – influence markets. If shares have been robust throughout the year, as has been the case so far in 2004, then a manager will not wish to have too much cash lying around. Since markets tend to rise more often than they fall, it is little wonder that December is usually a good month for shares.

Another reason for the seeming optimism surrounding shares could be the end of the housing boom. While it may be too early to be predicting a crash, the chorus of voices proclaiming that the party is over is growing in number and stature. Deutsche Bank is the latest to opine that the best is behind us, suggesting a 15 per cent fall next year. This all adds up to a sobering prospect for property investors.

Leading estate agent FPD Savills, on the other hand, is predicting a 2 per cent rise in 2005. As it happens, this would be the lowest rate of growth for nine years, so even if this more optimistic scenario were to arise, it would still mean that we should consign the recent housing boom to history. This would be no bad thing, though, given the imbalances that are developing in the residential market, and it might at least persuade people to introduce more balance into their investment portfolios.

On the macro-economic front, the International Monetary Fund has been lowering its forecasts for global economic growth. On the face of it, this could be no more than recognising that the rise in US consumer spending must moderate if the trade deficit is to be brought under control. It is more likely, though, that this downward shift is simply a reflection of the fact the IMF had factored in a lower level for oil than has proved to be the case. Even bodies as august as this can get their forecasts wrong.

Investors will doubtless be watching currencies and commodities closely as the year draws to a close. There are some strange things happening. Economic growth is slowing, yet commodities are booming. Higher raw material prices are not translating into rising inflation.

The dollar continues its downward path but the deficit remains intact. A December rally could be a selling opportunity after all.


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