Magazine article Global Finance

The Americas: Analysts: Dollar's Slide Has Only Just Begun

Magazine article Global Finance

The Americas: Analysts: Dollar's Slide Has Only Just Begun

Article excerpt

The US dollar doesn't have many friends among currency market analysts, who are near unanimous in forecasting a long-term decline against a broad range of currencies.

The best anyone is saying is that an outright collapse of the dollar is unlikely, and the pace of the decline is likely to slow following recent sharp losses.

The dollar had a historic second quarter of 2002, plunging 8.4% on a trade-weighted basis.

"A similarly dramatic quarterly fall has not been seen since the fourth quarter of 1987, and even that was somewhat more moderate, at 7.3%;" says Rebecca Patterson, analyst at JPMorgan Chase in New York.

The main reason for the steep decline in the dollar, she says, was that less foreign capital was flowing to the United States at a time when the currentaccount deficit was widening and the stock market was dropping sharply.

Even if US economic growth accelerates in the third quarter, as most economists expect, this won't be sufficient to halt the dollar's slide, which is mainly linked to risk aversion, Patterson says.

Analysts warn that if investors decide to keep more of their money at home in these uncertain times, it will become more difficult for the United States to finance its growing trade and current-account deficits.

"The current account is becoming more of an issue," says Bob Lynch, currency strategist at BNP Paribas in New York. "The US capital markets are not the draw they were just two years ago," he says.

The US accounting scandals bear some of the blame, Lynch says. "Accounting problems feed into the negative tone in the equity market," he adds.

The US equity-market slide is now two-and-a-half years old, with no end to its downward trend in sight, according to Michael Rosenberg, head of global foreign exchange research at Deutsche Bank in New York.

"We believe that the dollar has been lagging behind the trend in the US equity market, and therefore look for the dollar to experience a similar long-term slide, a slide that has really just begun," Rosenberg says.

"We are in a new era when strong US growth will be negative for the dollar because it will widen the trade deficit," he says.

Meanwhile, there is not much to attract capital flows into the United States, he says, with the Federal Reserve likely to stay on hold for most of 2002.This means that the dollar will bear the brunt of the adjustment process, he adds.

"Real short-term interest rates in the United States [rates adjusted for inflation] are in negative territory," Rosenberg says, adding that this hasn't happened since the 1970s.

The US administration is offering only lukewarm support for the dollar by stating that markets should determine the value of the currency, he says.

"Taken together with recent US tariffs on steel imports and the prospect of re-regulation following the various scandals in corporate America, the dollar does not seem to be the business-friendly currency it once was," Rosenberg says. …

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