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To: TobagoJack who wrote (27348)	1/12/2003 10:21:27 PM
From: elmatador	Respond to of 74559

The cracks widen: Dollar falls out of step with economy By Christopher Swann in London Published: January 9 2003 22:55 \| Last Updated: January 9 2003 22:55 Ever since the administration of President Bill Clinton, US officials have believed that strong economic growth would lead naturally to a strong dollar. Their faith is now being put to the test. This week the dollar hit its lowest level against the euro since November 1999. The US currency's 10 per cent trade-weighted fall in 2002 was its biggest since 1987. This was despite the fact that the US outpaced all other large economies in 2002, growing an estimated 2.4 per cent compared with just 0.8 per cent in the eurozone and a fall of 0.3 per cent in Japan. If forecasters are right, this combination of relatively strong US growth and a weak dollar will be continued in 2003. This raises the question of why the bold efforts of US policymakers to sustain growth - including the latest $674bn fiscal package - are not supporting the dollar. Some economists are pointing out that it is not just the pace of growth that counts but also the nature of growth. Between 1995 and 2000 economic growth in the US was driven by strong business investment, which rose by an average 8.6 per cent a year compared with 3.6 per cent in the eurozone. A belief that investment would boost rates of return meant that overseas investors were falling over themselves to plough money into the US. As a result the dollar rose 29 per cent on a trade-weighted basis over this period despite a rapidly rising current account deficit. Economic growth this year - forecast at about 2.7 per cent - is expected to be of a very different kind. Business investment fell 3.2 per cent in 2002 and is expected to rise by just 0.7 per cent this year. The impetus for growth is likely to come from consumption and government spending. This is much less positive for the dollar. With the US growing faster than other leading economies the US current account deficit may swell further, as consumers suck in overseas goods. The $500bn deficit in 2002 meant the US economy had to attract a net $1.9bn of overseas capital every working day to finance the shortfall. In 2003 the deficit is expected to be about $550bn. <<The less the money goes into the US to finace its deficit, the better the world economy will be>> This time the rise in the deficit is less likely to be balanced by exciting investment opportunities to entice foreign investors. As a result the dollar may have to fall further to attract the necessary foreign capital (the lower the rate, the more US assets foreign investors can buy with their currency). "When investors expect rising returns due to high investment it can be relatively easy to fund a current account deficit," says Paul Lambert, head of currencies at Deutsche Asset Management. "It will be much harder for the US to persuade the world to finance its consumption in the absence of strong investment opportunities." The saving grace for the dollar is that there are some who will continue to buy the dollar whether they make money or not. Figures from the Federal Reserve suggest that dollar holdings by foreign central banks rose by about $122.2bn last year. Analysts think that about $100bn was bought by some Asian central banks keen to prevent their own currencies from rising against the dollar and therefore extinguishing export growth. This is likely to continue in 2003, especially since two of the world's biggest current account surplus economies, China and Hong Kong, peg their currencies to the dollar and so automatically accumulate purchases of the US currency. This will slow the dollar's fall rather than halt it. US policymakers may have to start getting used to the apparent paradox of a strong US economy and a weak dollar.