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The dollar’s weak trend was corrected last week, with the currency bouncing back particularly against the euro.

U.S. stocks are hitting bottom, which suggests the end of a weak dollar. U.S. stock prices are expected to be a main force moving the exchange rates in the medium to long term.

But the correlation between currency rates and stocks has weakened recently. While share prices shot up last week after fears of July 4 terrorist attacks failed to materialize, the dollar strengthened much more modestly.

Higher U.S. stock prices may not mean a stronger dollar against the yen, even in the short term. The return of funds into bourses may spur foreign investors to resume buying Japanese shares, causing yen-buying pressure.

Such pressure, which was mitigated by nonresidents’ selling of Japanese stocks in late June, will return should they turn into net buyers. The current-account surplus may also fuel yen-buying.

The dollar’s appreciation against the yen will thus be limited, and not rise above 122 yen, even if the U.S. economy and stocks remain bullish.

In the medium to long term, the U.S. corporate sector will remain a major factor moving currency rates. Business conditions in July and after deserve more attention than April-June earnings reports, to be released this week.

A gradual recovery in capital spending is a favorable factor. But if firms try to cut their debts further in a postbubble aftereffect, the flow of funds into dollar-based assets will be limited, hence a prolonged cheap dollar period.

The U.S. has been tackling the bubble burst with strong monetary and fiscal action to boost aggregate demand. This has kept the economy growing, and consumer spending remains firm, albeit barely.

But as a side effect, the fiscal balance has fallen into the red. It will take some time before the corporate sector and its investment recovers.

Investors are not attracted to the U.S., what with its “twin deficit” and sluggish corporate sector.

Demand for a strong dollar has shrunk in both the industrial sector and stock exchange. A correction of the overvalued dollar is desirable for U.S. firms, which need to recover earnings most. Since a weak dollar troubles few in the U.S., Washington will probably not halt the trend.

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