Forum Archive Index - June 2002

["Nick Kearney" <nickk@quicksilver.net.nz>]

From Bloomberg

 

06/01 10:17
Dollar May Extend Record Stretch of Declines: Currency Outlook
By Beth Thomas

New York, June 1 (Bloomberg) -- The dollar may continue to fall against the euro as investors move capital away from the U.S. on concern the pace of recovery is slowing.

``There is a fundamental shift out of U.S. dollar investments going on,'' said Laurie Cameron, head of global foreign exchange in New York at J.P. Morgan Chase & Co.'s private bank, which invests $300 billion. The U.S. is ``not going to be able to attract huge new chunks of foreign capital'' needed to support the dollar, she said.

The U.S. currency dropped for a record fourth month against the euro, sinking 3.5 percent in May to 93.33 cents per euro. The dollar's four-month drop against the yen, to 124.26 yen, was the longest since the last half of 1999. It touched a 16-month low against the euro and a six-month low versus the yen on Thursday.

Against a basket of currencies including the yen, euro, Swiss franc, British pound, Swedish krona and Canadian dollar, the dollar has lost 5.8 percent of its value so far this quarter.

More than $1 billion a day flows from the U.S. to foreign hands as a result of the U.S. current-account deficit, which swelled to a record $417.4 billion in 2001. That leaves the currency vulnerable when international investors shift to other countries.

``There's a growing questioning of the ability of the U.S. to continue to finance (the deficit) as it has done up to now,'' said Tim O'Dell, who helps oversee about $25 billion at Investec Asset Management in London.

Money Flows

Europeans bought $17.1 billion more stocks and bonds from U.S. investors than they sold in January and February, down from $54 billion in the same period a year earlier, and compared with $61 billion in the first two months of 2000, according to U.S. Treasury figures.

Money managers are turning outside the world's largest economy on expectations growth and corporate profits may be slow to recover from recession. After the Federal Reserve cut interest rates to a 40-year low of 1.75 percent last year, returns on U.S. fixed-income investments are also less appealing.

Yields on 10-year German bunds, for example, are 11.5 basis points higher than those on U.S. Treasury notes of the same maturity. That's a reversal from two months ago, when the U.S. debt had a 17 basis-point advantage.

In the past, ``if you're a European or Japanese investor, you'd invest in the U.S. because you expect better returns,'' said Guillaume Sciard, who manages 2.2 billion euros ($2 billion) at Barclays Asset Management France in Paris. ``Now there's a question mark about the U.S. currency.''

Euro `Magnet'

Sciard holds more euro-denominated bonds relative to his benchmarks than dollars, British pounds and yen. He said the euro may climb to $1 by the end of the year.

Reports showing German business confidence rose for a sixth month in seven are fueling optimism for growth in the 12-nation economy and stoking demand for assets in the common currency, investors said.

``There's a serious possibility the euro is going to emerge as a leading magnet for disaffected dollar money,'' said Investec's O'Dell, who holds ``significantly'' more euro- denominated investments than suggested by his benchmarks.

Money also flows to Europe as a result of the current-account surplus, which grew to 3.7 billion euros ($3.45 billion) in March from a deficit of 600 million euros ($560 million) a year earlier, the European Central Bank said.

``The euro has got a good shot at becoming the currency of the year,'' said Peter Fontaine at KBC Asset Management in Brussels, which invests 25 billion euros in bonds.

Doubts

Some investors disagree.

``There are problems in the U.S., but productivity growth is still much higher than in Europe,'' said Joop Bresser, who helps oversee 17 billion euros ($15 billion) at Delta Lloyd Asset Management in Amsterdam. ``I'm in doubt about whether this euro rally will continue.''

The U.S. economy will expand at an annualized 3.1 percent this quarter, compared with 5.6 percent in the first, according to the consensus of the Blue Chip Economic Indicators survey. The European Commission cut its growth estimates to 0.2 percent from 0.3 percent for the first quarter and to between 0.3 percent and 0.6 percent in the second for the dozen-nation economy.

Yen Sales?

Japan's yen rose as foreign investors lifted the Nikkei 225 stock index 17 percent in the past four months. Overseas investors were net buyers of Japanese stocks for the six weeks ended May 24, according to the Tokyo Stock Exchange.

A report next week will show the world's No. 2 economy grew an annualized 6.8 percent in the January-March period, according to economists' forecasts in a Bloomberg News survey. The prospect of a recovery from Japan's worst post-war recession is bolstering optimism for the country's assets, some investors said.

Still, the yen's rally may stall on concern Japan will again sell the currency. The central bank sold the yen on three days in the past two weeks to keep it from gaining more and eroding exporters' earnings.

``We are paying close attention to the currency,'' as ``we can expect them to come in regularly and slow any rapid moves,'' said Andrew Milligan, who helps manage 75 billion pounds ($110 billion) at Standard Life Investments in Edinburgh.