Dollar could weaken as focus turns to economy
By Jennifer Hughes in London
Published: August 2 2002 15:55 | Last Updated: August 2 2002 15:55
Financial Times
Currency markets last week returned their attention to economic data from equities, but analysts warn that the outlook for the dollar remains bleak.
Investors who shifted their focus away from a steady stream of Wall Street scandals this week have found little comfort in the medium-term economic picture, and nor are they likely to.
"The prospects for a double-dip recession are definitely back in play," said Kamal Sharma, currencies strategist at Commerzbank. "Investors are asking where the stimulus to economic growth in the US will come from."
US employment, consumer confidence and GDP data, as well as manufacturing activity report all disappointed the markets this week and sent the euro to a one-week high of $0.9918 on Friday.
Data on service sector activity, retail sales, consumer credit, productivity, inflation and consumer confidence are due in the next fortnight, as is a meeting of the Federal Reserve. This week's poor economic data prompted an increasing conviction that members of the Federal Open Market Committee will consider cutting interest rates further.
The central bank currently has a neutral bias, and last cut rates in December 2001 to 1.75 per cent, a 40-year low. Fed fund futures contracts, an indication of market perceptions on rates, are beginning to suggest a rate cut by the end of the year.
"Against this background, it is difficult to see the recovery in the US dollar from mid-July lows being maintained," said Neil McKinnon, chief economist at ECU, the currency debt management group.
In a sharp move sparked by a slide on world stock markets, the euro rose to a 30-month high at $1.0210 against the dollar in July, up more than 13 per cent on the year. The ytrade weighted dollar index has weakened by nearly 10 per cent this year and stood at 106.66 on Friday after hitting a 29-month low at 104.18 last month.
The gaping US current account deficit is another factor likely to weigh on the dollar. The deficit is expected to reach $450bn this year, approaching danger levels just as waning confidence in US assets makes it more difficult to fund.
"Asset markets are declining, [in]flows are slowing and the current account still needs to be financed - in the medium term the deficit has to be bearish for the dollar," said Mr Sharma.
Beleaguered dollar bulls point out that data elsewhere have hardly painted a prettier picture, and that stock markets around the world have fallen by at least as much as their American counterparts.
But investors are choosing to ignore those numbers and focus on America.
And there might even be an element of schadenfreude in the market's attitude to the dollar.
"The US has been riding too high for too long and we are clearly looking for a fall," said one London-based analyst. |
