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To: Les H who wrote (5099)	1/24/2003 3:00:24 PM
From: pallmer	Respond to of 29600

-- Could weak dollar reverse flight from U.S. assets? -- By Javier David NEW YORK, Jan 24 (Reuters) - Global investors unsettled by U.S. economic weakness, low rates of return and the threat of a Mideast war have roundly shunned the dollar, which analysts say could prompt a deeper liquidation of U.S. assets. Paradoxically, some say a cheaper dollar could in the longer-term attract capital flows back into American financial instruments, with a weaker currency making U.S. assets relatively less expensive than they have been in recent years. On Friday, the dollar fell to a 3-year low against the euro <EUR=> and sterling <GBP=>, probed a 4-year trough against the Swiss franc <CHF=> and neared a 4-month low against the yen <JPY=> as worries over a war with Iraq reached a crescendo. A chief concern of the investment community has long been the massive U.S. trade deficit, which has helped to widen the nation's current account deficit to about 5 percent of U.S. gross domestic product. "The current account deficit is an accounting identity. It always gets financed, but the question is: 'By whom and at what price?'" said Nic Pifer, a portfolio manager at American Express Asset Management in Minneapolis. To fund the current account deficit, capital flows into the United States need to run at about $2 billion a day. A research note from Citibank this week put securities inflows at $40 billion for the entire month of October 2002. It noted that those flows had begun to wane as U.S. securities became less attractive. Over the past two years, as the U.S. Federal Reserve has lowered interest rates to the lowest level in a generation, yields on U.S. bonds have become less attractive than yields in European debt markets. This has led to lower overall capital flows into the United States as investors seek out higher returns in other global markets. "The U.S. is already using a disproportionate amount of global savings," said Pifer. "Against a backdrop where real interest rates in the U.S. are quite low, for foreign investors, that obviously gives them some pause." For years, one of the benefits of a strong dollar was the relatively high returns it provided foreign investors who held U.S. assets. But with the U.S. stock market unable to gain traction and bonds prices appreciating unevenly at best, investors have few reasons to hold the greenback The decline in the U.S. currency prompted Russia's central bank to announce on Thursday its intention to cut its foreign currency reserves to improve returns on its holdings, due to the "very low returns" on dollar-denominated assets. The move led to speculation that other global centers could soon follow suit. "The U.S. dollar has lost that investment aura," said Michael McGuinness, head of North American sales at American Express Bank in New York. "It's a currency that people will issue debt in, but I don't see the world seeing it as a vehicle to invest in right now, considering how low short-term lending rates are." HOW LOW CAN IT GO? The dollar's slide increases the currency risk for investors in U.S. assets and feeds back into the calculations of foreign investors who might otherwise consider buying U.S. stocks or bonds. "The risk is a self-fulfilling move, where investors start focusing on the United State's large funding need because of its current account deficit. That leads to concerns over the currency," Pifer said. But Peter Morici, professor of international business at the University of Maryland and a former chief economist with the International Trade Commission under former President Bill Clinton, says a weaker dollar may eventually serve the dual purpose of reducing the current account deficit while attracting foreign capital. As the dollar slides further, imports would become more expensive for U.S. consumers and exporters' profits would rise, narrowing the trade deficit. "We'd import less and use more domestic products, and that would be a boost to demand," Morici said. Additionally, "with a lower dollar, stocks become more of a bargain to foreign investors," he said. "Once the currency's down ... it would reach what investors consider a comfortable level, and at that point they would be more inclined (to buy)." Morici says the dollar would have to fall as far as 105 yen in order for the United States to reap the benefits of a weaker dollar. He contends that could happen within three to six months. However, markets have an unpredictable habit of overshooting when allowed to travel in one direction. "If foreign investors balk at U.S. assets at the current exchange rate and the dollar gets weaker and weaker, the point is, 'When do they become attractive?,'" asked American Express Asset Management's Pifer. ((Reporting by Javier David; editing by Dan Grebler; Reuters Messaging: javier.david.reuters.com@reuters.net; 646-223-6324)) (C) Reuters 2003. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world. nN22128260 24-Jan-2003 19:58:21 GMT Source RTRS - Reuters News