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To: MulhollandDrive who wrote (22892)	1/23/2003 8:59:09 PM
From: MulhollandDrive	Respond to of 57110

news.ft.com Davos economists predict falling dollar By Ed Crooks and Guy de Jonquieres in Davos Published: January 23 2003 15:46 \| Last Updated: January 23 2003 15:46 An ever more unbalanced world economy and a falling dollar were predicted for the year ahead by economists and bankers gathering in Davos on the first day of the meeting of the World Economic Forum. A senior official of the Bank of China warned of "very volatile" exchange rates and, in particular, further falls in the dollar. Last year the dollar fell more on a trade-weighted basis than in any year since 1987. In the WEF's opening session, there was general agreement that the outlook for the world is, for the immediate future at least, synonymous with the outlook for the US. Since 1995, the US has accounted for very nearly two thirds of the growth in global gross domestic product and there are few indications that this dependence is changing. As Stephen Roach, chief economist of Morgan Stanley, put it: "The world is more US-centric now than it has ever been." While they accepted there were significant risks to the outlook, most notably from the record level of household debt, economists forecast that the US might grow by between 2 and 3 per cent this year. If it does, it is likely once more to be the best performer of the world's five biggest economies. Jürgen von Hagen of Bonn University, an adviser to the German government, said he expected the eurozone to grow by no more than 0.8 per cent this year. There was also a risk that Germany, Europe's largest economy would slip back into recession. The Japanese government expects growth of about 0.6 per cent this year. In nominal terms, allowing for the continuing fall in prices, GDP is expected to decline. The one significant bright spot is China, which grew by about 8 per cent last year. But as it provides less than 4 per cent of total world GDP, its impact is still relatively minor. If those expectations are fulfilled and global growth is unbalanced for yet another year then the US current account deficit, already about 5 per cent of GDP last year, will continue to grow, hitting 6 per cent, according to Mr Roach. The problem for the dollar is that the deficit is becoming increasingly difficult to finance. Capital flows from Europe and Japan to the US have been falling, and by the fourth quarter of last year the main inflow was from Asian countries other than Japan. Zhu Min, general manager of the Bank of China, said he did not believe those flows could be relied on. "Asia has been exporting to the US, and buying US Treasury bills, and so far everybody has been happy. But I don't think it is sustainable," he said. "Dependence on Asian capital flows to sustain the deficit is not healthy." He argued that when short-term interest rates were 4 per cent in the UK and 2.75 per cent in the eurozone, compared with only 1.25 per cent in the US, capital flows from Asia were subject to change. The fact that the inflows to the US were increasingly financing not business investment but the budget deficit would be an additional problem for sentiment. "I think this year the foreign exchange regime will be very much volatile," he said. Not everyone believes the dollar must fall. Gail Fosler, chief economist of the Conference Board, the business research group, predicted "a very sharp recovery" to higher levels than in the 1990s once the Iraq crisis has been resolved. But the dollar fell again on Thursday, hitting a three-year low on a trade-weighted basis as the euro rose above $1.076.