"US needs to attract a net $1.7bn of overseas funds every working day in order to prevent the dollar from falling."
We are hoping that the vacuum cleaner which has been the US over the past decade is finally turned off for the good of the world's economy.
Many parts pof the world are starved for capital that went to fuel the WorlComs, Enron's and Tyco's. The fall of the dollar is most welcome and overdue!
Parity with euro spurs fears of rout for dollar
By Christopher Swann in London
Published: July 15 2002 20:31 | Last Updated: July 15 2002 20:31
Symbolism is important in the currency markets and euro parity with the dollar is the biggest symbol of all.
When the euro fell through $1 in February 2000 it was a powerful blow to the prestige of the infant European currency and a sign of the pre-eminence of the US economy.
Monday's move back through parity is no less potent a symbol but this time it is the US economy that has suffered. What is more, economists fear that now the dollar has crossed the threshold of parity, the fall in the dollar could turn from a gentle fall into a rout.
For the US, the fall back through parity is the final sign that markets have lost faith in the magic of the US economy, which has been the motor of the world economy for the past decade.
"This is the final nail in the coffin of the new economy," said David Bloom, currency strategist at HSBC in London. "The US has spent years telling the rest of the world how to run their economies and now markets are finally awakening to the problems of the US economy."
By contrast, European politicians are likely to feel that the much-mocked euro has finally come of age. Most claimed all along that the dismal performance of the euro in its first two years - during which it fell 20 per cent against the dollar - was largely a consequence of over-optimism for the US economy. International investors, until recently sceptical about the prospect of a swift dollar fall, are now starting to sit up and take notice. Many economists think that central banks may now begin to diversify their reserves away from dollars, accelerating the fall in the greenback.
Estimates suggest the Chinese central bank holds just 5 per cent of its reserves in euros, while about 20 per cent of trade is euro related.
"A lot of central banks are hold fewer euros in their reserves than would be justified by the importance of their trade and financial links with the eurozone," said Avinash Persaud, head of research at State Street, the Boston-based investment bank. "There is a sense that many were holding off until the euro had matured."
The dollar is vulnerable to even small changes in sentiment. With the US current account set to top $450bn in 2002, the US needs to attract a net $1.7bn of overseas funds every working day in order to prevent the dollar from falling. Investors and central banks do not need to sell the currency for it to go down: it is enough that they slow their purchases of US assets.
Yet crumbling confidence in the integrity of US corporate governance has been reducing the willingness of international fund managers to increase their holdings of US companies. Even if US profit and loss accounts are to be trusted, the price of US equities still looks expensive.
"Corporate scandals in the US appear to be leading more investors to keep their money at home," says Larry Cantor, head of foreign exchange research at JP Morgan Chase in New York.
Investment banks say that an increasing number of their clients who have large holdings of US assets are seeking to protect themselves against a further fall in the dollar. Since that is done by selling dollars, the fall becomes a self-fulfilling prophesy.
The difficulties of the dollar are exacerbated by the mounting fiscal deficit. The US government has moved swiftly from a budget surplus of approaching $300bn to a deficit of close to $200bn since the end of 2000. While international fund managers are often prepared to finance private investment, they tend to be less willing to bankroll government consumption.
So far, the dollar's gentle fall has been seen by economists as relatively positive, both for the US and other large economies. In the US, it has given much-needed help to struggling exporters without kindling inflationary concerns. In the eurozone, it looks likely to postpone the need for higher interest rates. Some economists argue that by making it harder to export to the US, the dollar's fall could help promote faster structural reform in Japan and the eurozone.
An accelerated sell-off in the dollar, by contrast, would be more disruptive. "If the dollar's fall gathers pace, we are more likely to see an exodus from US markets, ra ther than just a reluctance to buy or a desire to hedge," says Paul Meggyesi, an independent currency strategist.
Not only would a sell-off in the dollar further unsettle US stock markets, it would make it harder for the eurozone and Japan to adjust to a higher exchange rate. Policy makers will be hoping that the dollar's fall will continue to be relatively sedate. |
