U.S. Economic Recovery May Slow, Extending Dollar's Slide Against Euro (Bloomberg News)
Wednesday, July 2, 2003
bloomberg.com The dollar may extend its 9.3 percent decline against the euro this year amid concern the pace of economic recovery in the U.S. will falter, a Bloomberg News survey indicates.
The U.S. currency will weaken to $1.19 at the end of the third quarter, after gaining 4 percent against the euro in June, according to the average forecast of 56 analysts, traders and investors. It may end the year at the same level, according to the survey that was conducted in the last two weeks of June. The dollar traded at $1.1564 at 5 p.m. in New York.
Federal Reserve policy makers, who last week cut interest rates to the lowest in 45 years, said the economy "has yet to exhibit sustainable growth.'' The U.S. economy has lost 324,000 jobs in the past six months and economists surveyed by Bloomberg News predict growth will fall short of 2 percent in April to June for a third quarter, damping the allure of investing in dollars.
"The Fed is still concerned about the economy and the economic news is patchy at best,'' said Simon Rubinsohn, chief economist at Gerrard Ltd. in London, which manages the equivalent of $27 billion. "The factors contributing to the dollar's drop haven't gone away.''
U.S. manufacturing unexpectedly contracted for a fourth straight month in June, the Institute for Supply Management said on Tuesday. Initial jobless claims fell to 404,000 last week, the lowest in three months. That still exceeds the 400,000 level some analysts consider the dividing line between job creation and contraction.
'Shaky' Economy
"The U.S. economy is still a little shaky,'' Herbert Hainer, chief executive officer of Adidas-Salomon AG, the world's second- biggest sporting goods maker, said in a televised interview in Munich. "The euro was undervalued -- now it's coming back.'' A range between $1.10 and $1.20 is "fair value'' for the euro, he said.
Rubinsohn, along with London-based analysts at Barclays Capital, Tokyo-based Sumitomo Mitsui Financial Group, Inc. and Credit Agricole Indosuez, has the most pessimistic forecast for the dollar by the end of September. He predicts it will slide to $1.25 by the end of the quarter and trade at about $1.20 by late December.
For the end of the year, Credit Agricole had the most negative dollar forecast, forecasting a drop to $1.30. HSBC Holdings Plc and Travelex Group were the next most bearish, expecting the dollar to tumble to $1.27.
Travelex Forecast
Travelex, based in Peterborough, north of London, had the best accuracy record for predicting the euro-dollar exchange rate -- the world's most widely traded currency pair -- for the nine quarters ended on March 31, according to Bloomberg data.
Fifty-five percent of forecasters expect the euro to end the year at $1.20 or above, while 36 percent see it at or below $1.15 by that time.
The U.S. economy is forecast to grow this year at more than twice the pace of the countries sharing the euro and faster than Japan, according to the European Union. That may not be enough to persuade foreign investors to plow enough capital into the U.S. to offset the deficit in its current account and maintain the dollar's value, analysts said.
The current account deficit widened to a record $136.1 billion in the first quarter. In contrast, the euro region's deficit was 8.1 billion euros in April, after a surplus of 1.4 billion euros in March. Japan has a current account surplus.
"The U.S. needs $550 billion a year just for the dollar to stand still,'' said David Bloom, a currency analyst at HSBC in London. Investors' optimism about "a cyclical recovery in the U.S. is false.''
Taking the Strain
Bloom also expects the euro to rise because "Asian currencies like the yen, South Korean won and Chinese yuan are either managed or pegged to the dollar, which means it's only the euro'' that can take the strain of the dollar's weakness.
Demand for the U.S. currency may wane after the Fed last week cut its benchmark borrowing rate to 1 percent, reducing the return on some dollar-denominated assets like bank deposits and government bonds, analysts said. The European Central Bank's key rate is 2 percent.
Dollar-denominated three-month deposits yield 1.07 percent, compared with 2.12 percent in the countries sharing the euro. The yield on the 4 1/2 percent German bond maturing in 2013 was 3.81 percent at 5:32 p.m. in London on Tuesday. A 10-year U.S. treasury bond yielded 3.52 percent.
'Front of the Curve'
Last week's Fed rate cut brought the total reduction in U.S. borrowing costs to 5.5 percentage points since January 2001. The ECB, which has tempered speculation it will match the Fed's reduction, has lowered its rate by a total of 2.75 percentage points since May 2001.
"The Fed are in front of the curve in terms of making the economy grow again,'' said Mario Kelly, one of two partners at London-based Wallwood Consultants Ltd., which advises individual investors on currency trades. Investors "will start looking more at growth than concentrating so much on the current account.''
Washington-based Tempus Consulting forecasts a gain in the dollar to $1.09 at the end of September and $1.02 by year-end, the most optimistic forecasts. Wallwood, the most accurate forecaster in Bloomberg's quarterly foreign exchange survey for the nine quarters ended March 31, was the next most positive, forecasting a gain to $1.07 by year-end.
A weaker dollar has also helped boost sales at U.S. companies including Caterpillar Inc. and 3M Co. Caterpillar, the world's largest maker of earth-moving equipment, said first-quarter net income rose 61 percent because of increased machinery sales, lower costs and the weaker dollar.
3M, the maker of products such as Post-it Notes and Scotch tape, said favorable exchange rates accounted for 5.6 percentage points of an 11 percent revenue gain in the quarter.
European Companies Hurt
The euro's gain may damage Europe's economy by making companies like Suess Microtec AG, a German maker of equipment for semiconductor manufacturers which gets 60 percent of its sales outside the countries sharing the euro, less competitive.
"A euro worth $1.25 to $1.30 would really hurt us,'' said Franz Richter, Suess Microtec's chief executive officer, in an interview. "Our financial planning was based on parity with the dollar. The currency effect may curb sales by 8 percent this year.''
Other European companies including Royal Philips Electronics NV, Europe's largest maker of consumer electronics and Pernod- Ricard SA, the world's third-largest liquor company, have said the euro's gain is limiting sales abroad by making exports appear less attractive.
Japan Sells Currency
The yen will trade at 117.42 per dollar at the end of the third quarter and 118.21 at the end of December, according to the survey. It was recently at 120.10. Bank One Corp. was the most bearish, expecting it to weaken to 125 in three months and 130.3 by year-end.
The yen will drop because the "Bank of Japan will vigorously cap any'' gains in the currency that make the country's exports less competitive, said Ryan Shea, an economist at Bank One in London. "It needs to keep its currency weak.''
The BOJ, at the behest of the Ministry of Finance, sold a record 3.98 trillion yen ($33.7 billion) in May to keep its currency from strengthening and has spent more than 6 trillion yen this year.
A stronger currency may push Japan into recession for the fourth time in 12 years because it makes it more difficult for exporters such as Toyota Motor Corp. to compete with rivals overseas and reduces their revenue in yen terms.
Sumitomo Mitsui forecasts the yen will gain to 110 by the end of September, the most bullish estimate, while seven institutions including UBS AG and Merrill Lynch & Co. expect it to trade at that level by the end of the year.
The British pound will end both the third and fourth quarters at $1.67, while the Swiss franc will rise to 1.31 per dollar by the end of September and 1.32 by year-end, according to the survey. The pound was recently trading at $1.6613 and the Swiss franc at 1.3403. |
