The WSJ must be reading what I post, check-out this from the front page, sounds like what I have been saying for months now> Oh, about that bounce, I just don't know. The markets have really gotten bad breadth, the kind that Listerine might not help, if you know what I mean ;~>
No Safe Haven: Dollar's Slide
Reflects Wariness About U.S.
By JACOB M. SCHLESINGER and CRAIG KARMIN
Staff Reporters of THE WALL STREET JOURNAL
The dollar appears to be beginning a long-anticipated slide, and that could keep U.S. stock prices in the doldrums and put upward pressure on interest rates.
The dollar's decline against the euro, the yen and other major currencies signals a slackening of global investors' seven-year ardor for the American economy, which helped to propel this country's bull market of the late 1990s. A growing number of global money managers have begun to find other parts of the world more appealing, which threatens to reduce the more than $1 billion a day that foreigners have been sending to the U.S. in recent years.
"A love affair is dying," Morgan Stanley investment strategist Barton Biggs observed after a recent trip through Europe.
A sustained fall in the dollar would have other consequences. The impact would probably be an uptick in inflation, by boosting import prices and making it easier for domestic manufacturers to raise their own prices. On the positive side, it also could bring an increase in exports that would boost overall growth.
The value of a nation's currency is a weather vane, showing the direction the winds of international capital are blowing. When investors send more money into the U.S. than they take out, the dollar strengthens because investors need dollars to buy U.S. assets. The weather vane now seems to be turning: The dollar last week traded at a six-month low against the yen and near a 16-month low against the euro.
Although the dollar has seen ups and downs before, the significance for markets could be far greater this time because the U.S. has become dependent to an unprecedented degree on foreign capital. Any sign that overseas investors are losing appetite for U.S. investments has bigger implications than in the past.
End of an Era?
A continuing fall in the dollar could signal the end of an era that began around the mid-1990s when the American economy was seen as invulnerable. The escalating infusion of capital and the rising dollar were key to the virtuous cycle of American prosperity. Foreigners sent money to the U.S. assuming they could get better returns than anywhere else. U.S. companies used that money to buy new high-tech equipment that helped fuel the productivity boom that raised the economy's growth rate, corporate profits, and stock prices -- making the U.S. an even more attractive place to invest. The rising dollar made returns even higher for foreigners when they converted gains into their own currencies.
The seemingly invincible dollar encouraged foreigners to keep buying U.S. stocks, bonds, companies, factories and real estate. It also helped contain inflation by reducing import prices and making it harder for U.S. manufacturers to raise prices.
So Jerry Jasinowski, president of the National Association of Manufacturers, calls the dollar's recent decline "good news." He's rooting for an even more substantial drop than the modest 3% slip against a basket of currencies so far this year. "We'd like to see the dollar continue to reflect market conditions and decline 15% to 20% this year," he says.
In the 1990s, everything seemed to go right for the U.S. economy, and the dollar's strength reflected that. Though the recent recession is over, a return to that past rapid growth seems unlikely. The U.S. stock market is no longer seen as a one-way bet. After years of double-digit returns, the Standard & Poor's 500 index dropped more than 10% in each of 2000 and 2001. It is off another 8% in the first five months of 2002.
Boasts about world-class corporate disclosure, bookkeeping and regulation of American financial markets have become laughable in the wake of the Enron and Arthur Andersen scandals. Washington's reputation for rising above politics in favor of sound economic policy -- symbolized by budget surpluses and free-trade agreements -- is sullied with the return of deficits and protectionism. And now that the U.S. has become a target for terrorists, the U.S. no longer seems a safe haven.
"I think the depreciation of the dollar will continue, because of the growing distrust toward the U.S. financial system," said Jeong Young Sik, a senior researcher at South Korea's Samsung Economic Research Institute.
Investor sentiment also now seems to be improving about Europe, and the market seems to have more confidence in the euro, which slid steadily after its launch and the creation of a new pan-European central bank in 1999. Christopher Wolfe, global equity strategist for J.P. Morgan's private bank, has moved more than $1 billion out of the U.S. to overseas markets. So far, it has been primarily to Asia, but now he's looking more at Continental Europe. "Once we see some of the structural reform in Europe, we plan to move even more money there," he says. "We expect to see more progress in these areas later in the year." The euro traded Friday at 93.07 cents, down from 93.77 cents Thursday, but up from the 89.04 level where it began the year.
Foreign capital is especially important to the U.S. economy because Americans save so little, and that's the only other way an economy finances investment. Although the U.S. government increased its savings as it began running budget surpluses in the late 1990s, American households, which haven't been thrifty in a generation, saved less. The household savings rate -- the fraction of aftertax wages that isn't spent -- fell from 8.7% in 1992 to 1.6% in 2001.
Foreign investors made up the gap. Today, foreigners hold 40% of U.S. Treasury marketable debt, 24% of the U.S. corporate bonds and 13% of U.S. equities, according to estimates by money manager Bridgewater Associates of Westport, Conn.
"There are ever-increasing claims on the American economy by foreign investors and that can't go on indefinitely without some difficulty, history tells us," Federal Reserve Chairman Alan Greenspan told Congress earlier this year.
But capital flows and currency values reflect the relative appeal of markets, not absolute rankings. Even if the U.S. remains No. 1, a narrowing of the gap with other economies will divert money and depress the dollar. UBS Warburg economists talk of an "equalization of investment opportunities, the result of the investment overhang in the U.S. and important economic changes in Europe, and, in particular, in Asia." They note that a wide range of economies -- Australia, New Zealand, Canada, South Korea, Thailand, Malaysia, Indonesia, the Philippines -- all appear to be pulling out of recession faster than the U.S.
Still, many economists believe the dollar is beginning a slow, steady decline. Macroeconomic Advisers LLC, a St. Louis forecasting firm, says, "We assume the broad, real trade-weighted value of the dollar declines another 6% through the end of 2003." Mark Zandi, chief economist for Economy.com in West Chester, Pa., expects the dollar "to depreciate by some 10% beginning later this year and extending through the mid-part of this decade." |
