| | Watchdog's U.S. budget forecast feeds dollar bears
Tue Jan 25, 2005 05:17 PM ET
By Kevin Plumberg
NEW YORK, Jan 25 (Reuters) - A nonpartisan group's forecast on Tuesday that the U.S. budget deficit will hit $368 billion this year put a spotlight on the dollar's weak point and could ultimately drag the currency lower, analysts said.
The Congressional Budget Office, Congress' fiscal watchdog, previously expected a budget gap of $348 billion and said its current forecast does not include billions of dollars needed to pay for military action in Iraq and Afghanistan.
"The dollar brushed off the news initially, but the outlook will reinforce the preexisting dollar bearishness of those who see fiscal prudence as vital in helping narrow the current account deficit," said Sean Callow, currency strategist with IDEAGlobal, a New York consultancy.
The fact that the CBO's budget forecast worsened and that it openly understated the actual deficits to come made analysts increasingly skeptical of the Bush Administration's reelection campaign promise to cut the budget gap in half by 2009.
The dollar barely reacted to the CBO forecast but currency traders took note of direct comments the watchdog made on the dollar and the dim prospect for foreign investment in U.S.
"CBO expects that the exchange value of the dollar will decline during the next two years" and that "investors will be less willing to add to their holdings of dollar assets at current exchange rates and interest rates," the group said in a report.
The dollar fell to record lows against the euro last month on concerns that foreign investors may slow their purchases of U.S. assets and significantly widen the huge U.S. current account gap -- the broadest measure of the country's trade balance.
Bob Sinche, head of global strategy with Bank of America in New York, said he was "extremely surprised" by the CBO's comments, especially since the group has not been known to speak directly on the currency.
Regarding CBO's current budget forecast, he said: "We're getting a cyclical improvement but the overall deficit isn't improving."
Separately the White House Tuesday estimated that the budget gap, including an extra $80 billion for operations in Iraq and Afghanistan, will reach $427 billion this year.
Given the $80 billion in additional expenditure and the administration's massive overhaul of Social Security, "markets are unlikely to take pledges to halve the deficit in five years at face value, even if the fiscal year 2006 budget contains serious efforts at restraint in discretionary spending," said UBS currency strategist Daniel Katzive in a note to clients.
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