Dollar May Fall a Fifth Week Against Euro: Currency Outlook
By Elizabeth Stanton
New York, Dec. 28 (Bloomberg) -- The dollar may fall for a fifth week against the euro on concerns a U.S. attack on Iraq and escalating tensions with North Korea would slow growth and discourage investment in the world's largest economy.
The dollar sank to its lowest against the euro in more than three years this week after Iraq shot down an unmanned U.S. spy plane and North Korea expelled United Nations nuclear inspectors.
``People will shy away from the dollar as conflict risks increase,'' said Sudi Mariappa, who helps manage $23.5 billion of global bonds at Pacific Investment Management Co. in Newport Beach, California. It is unclear how the U.S. will respond to North Korea and ``whenever you get a situation like that it's going to be negative for the dollar,'' he said.
The dollar weakened to $1.0442 per euro yesterday, its lowest value since Nov. 17, 1999, from $1.0276 a week earlier. It has fallen 4.5 percent against the 12- nation currency this month, deepening its loss on the year to 14.8 percent. The dollar is headed toward its first annual decline against the euro, which began trading in January 1999.
The euro, which has climbed 17 percent against the dollar this year, may gain an additional 15 percent in the next six to nine months to about $1.20, Mariappa said.
Against the Japanese currency, the dollar fell for a third week to 119.87 yen, a six-week low, from 120.38. It has declined 8.9 percent this year.
`Ongoing Problem'
The dollar will drop as investors foresee lower returns on U.S. investments and growing tolerance by the U.S. government for a weaker dollar to make exports more competitive, Mariappa said.
The U.S. economy probably expanded 2.4 percent this year, according to the latest Blue Chip Economic Indicators survey, faster than last year's 0.3 percent rate yet slower than in the late 1990s, when growth rates exceeded 4 percent annually.
The dollar is vulnerable to losses when global strife makes investors cautious because the U.S. current account, the broadest measure of the nation's trade, is in deficit, analysts said.
To keep the dollar from weakening the U.S. needs almost $1.4 billion a day in foreign investment to offset that deficit.
``It's an ongoing problem for the dollar that there's less interest on the part of foreign investors in placing money in the U.S,'' said Nic Pifer, who helps handle $1.1 billion of global bonds at American Express Financial Corp. in Minneapolis. It's exacerbated ``during periods of risk-aversion,'' said Pifer, who holds more euros in his AXP Global Bond Fund than his benchmark.
Gold, seen as a haven during crises, reached a 5 1/2-year high of $355.70 last week and has climbed 10 percent this month.
`Another Blow'
Additional reports of poor holiday sales also may weigh on the dollar, analysts said, after Wal-Mart Stores Inc., the world's largest retailer, lowered its December sales forecast this week and retailers nationwide slashed prices in a bid to salvage the season.
``It seems pretty clear the U.S. holiday spending season was not as robust as anticipated,'' said Michael Woolfolk, global currency strategist at Bank of New York. ``It could be another blow to the U.S. dollar toward the end of the year as holiday spending reports begin to trickle in.''
The dollar will weaken to $1.05 per euro next week and to $1.17 by the end of next year, Woolfolk said.
The prospect of a sustained rise in oil prices as a result of a U.S. attack on Iraq threatens the dollar, because it would depress economic growth, Woolfolk said. Oil prices rose to two- year highs this week partly in anticipation of a war and amid an almost month-old general strike in Venezuela.
Signs of Strength
Industry reports on the economy that are expected to show improvement may limit the dollar's losses, analysts said.
The Conference Board's consumer confidence index will likely rise to 86 in December from 84.1 in November, based on the median forecast of economists polled by Bloomberg News. The index, due Tuesday, rose in November for the first time since May.
On Thursday, the Institute for Supply Management is expected to report its December factory index rose to 50.2 from 49.2 a month earlier. Readings over 50 signal expansion. The index's last reading over 50 was in August.
Faster growth in the U.S. than in Europe and Japan failed to prevent the dollar from losing value this year, said Greg Anderson, senior foreign exchange strategist at ABN Amro Inc. in Chicago.
The dollar ``may weaken despite the growth differential,'' Anderson said. ``This year the U.S. outgrew Europe and Japan handily yet the dollar depreciated. There's no reason to think that couldn't happen again next year as well.''
The euro-zone probably grew 0.8 percent this year, the European Commission said last week, while Japan's government forecasts 0.9 percent growth for the fiscal year ending March 31.
The yen's gains may be tempered by prospects Japan will sell the currency to weaken it, analysts said. The yen's gains have made Japanese products more expensive overseas, complicating efforts to revive growth in the world's second- largest economy.
The Bank of Japan sold 4.016 trillion yen ($33 billion) of yen in May and June, according to the Ministry of Finance. The yen traded between 118.40 per dollar and 125.33 per dollar on those days.
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