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To: yard_man who wrote (199720)	10/23/2002 6:32:17 PM
From: Haim R. Branisteanu	Read Replies (1) \| Respond to of 436258

Dollar may fall 15-20% vs euro, yen-Morgan's Roach (Reuters) Tuesday, October 22, 2002 reuters.com The dollar could fall more than 15-20 percent in the next two years against the euro and the yen, Morgan Stanley's chief economist Stephen Roach said on Tuesday. The fall could be caused by a combination of adjusting the U.S. external deficit, a change in the U.S. government's "strong dollar" policy, and the effects of China pegging its currency to the dollar, he told an investment seminar in Tokyo. "Whether it is through fundamentals of current account adjustment (of the United States) or a shift from a 'strong dollar' policy in Washington, I think the dollar is going to fall. It's just a question of when," Roach said. The dollar would have to fall 15 to 20 percent on a trade-weighted basis to achieve the current account adjustment, he said. Morgan Stanley forecasts that the U.S. current account deficit will reach close to six percent of U.S. gross domestic product in 2003, from the current five percent. That would mean the United States would need to import $2 billion worth of foreign capital per day -- not an easy task with U.S. equity indices at current levels, he said. The U.S. deficit in its current account, the broadest measure of trade, which includes investment flows, was $393.371 billion in 2001, second only to the previous year's record $410.341 billion. A weakening of the dollar may ultimately be an unavoidable by-product of America's external imbalance, Roach said. One of the most important aspects of the unbalanced global economy was that the only realistic way to achieve a rebalancing would be a shift in the value of the world's most important currency, which was the dollar, he said. "Unfortunately, the dollar's peg with the Chinese renminbi really complicates the situation a lot for the dollar to achieve a 15-20 percent trade-weighted decline," Roach said. With a fixed renminbi, the dollar's fall would have to be even larger against the euro and the yen. "I think we certainly have to see a dollar/yen (exchange rate) falling through 100 and the euro/dollar to the north of 1.1500 to make the math work over a two-year period of time," he added. As the United States gets close and closer to deflation, the administration of President George W. Bush will have to give active consideration to using a weaker dollar as one of its last lines of defence against deflation, Roach said. "This would be unpopular in the rest of the world," he said. But he added: "I think a stronger euro and a stronger yen would be a very explicit signal to the ECB (European Central Bank), Europe in general and Japanese authorities that they must be more aggressive in stimulating domestic demand." Turning to the U.S. interest rate trend and the next policy move, Roach said he did not think interest rates would keep going up. The risk of deflation in the United States was greater than that of inflation, and a double-dip recession was more likely than a vigorous recovery. "I do remain bullish on interest rates, with possibility of the Fed next move to be an aggressive easing rather than a tightening," he said.