Merrill Economist Warns Dollar May Continue to Weaken
Tue Jun 3, 2:35 AM ET
CANBERRA -- The U.S. dollar will weaken further through 2003 and 2004 as the U.S. attempts to use it to reflate its economy and boost economic growth, Jesper Koll, Merrill Lynch Japan Securities chief economist, said Tuesday.
"The euro can easily strengthen another 15-20%" over the next 12-15 months, Mr. Koll told Dow Jones Newswires on the sidelines of a minerals conference in Canberra.
"I think by the end of the year we'll see US$1.3, easily," he said.
The euro was trading at US$1.1750, down from but still not far off lifetime highs.
Mr. Koll told the conference that deflation is a reality in the U.S. and for corporations "prices since the beginning of last year actually are relentlessly falling."
"This degree of deflation is very likely to continue for at least the next 12 to 15 months," he said.
"Deflation isn't just a risk; it's a reality," he added.
In response to a sluggish economy and the deflation, the U.S. is "pursuing an aggressive policy of depreciating its currency," Mr. Koll said.
What else could it do, he asked, after finding that both fiscal and monetary policy instruments are impotent.
This is what is going on now and "is exactly what is going to stay a guiding principle, or a guiding outcome of American policy, at least until the end of next year," Mr. Koll said.
But while the U.S. is focused on spurring economic growth and reflating its economy, Europe basically is still talking about inflation risks, he said.
As a result of those two forces, the U.S. is "flooding the world with dollars, while the ECB keeps the supply of euro tight," which will help underpin the euro-dollar rate, he said.
Eventually, the weak U.S. dollar will spur economic growth, and lead to economic recoveries in the U.S. and by linkages Asia into 2004 and 2005, he said.
Deflation imposes intense competition on prices, a relentless margin squeeze, and a very competitive business environment all around, Mr. Koll said.
It is for this reason that Merrill Lynch forecasts U.S. unemployment "by the end of this year is very likely to exceed 7%," from 6% now.
Mr. Koll reckons the global economy is in a supply-side economic recovery.
Over the next several years, around the world and in all industries, including resources, and reflecting the forces of globalization and technological developments, "you find that producers will offer more for lower price," he said.
"You've got tremendous downward pressure on prices because of this steady and relentless increase in competition," he said.
A weaker U.S. dollar will to some small extent support commodity prices, he said.
A weakening U.S. dollar has been a major supportive factor for gold in recent months, for instance.
But other forces also are at work, and Mr. Koll said that will weigh heavily on commodity prices.
The other forces include a slowing in economic growth due to the saturation of the U.S. auto market, which was a major driver of economic growth in 2002, and a possible hiccup to growth in China arising from the outbreak of Severe Acute Respiratory Syndrome, or SARS (news - web sites).
Moreover, Mr. Koll said he is starting to see some signs of "inventory dumping" in the steel and pulp and paper industries in the Asia-Pacific region.
Cyclically and independent of what happens to the U.S. dollar, Mr. Koll said " commodity prices are going to have a very tough time" and are going to come increasingly under downward pressure.
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