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To: pallmer who wrote (9448)	12/16/2003 11:57:13 AM
From: pallmer	Read Replies (1) \| Respond to of 29600

December 16, 2003 10:41 a.m. EST ANALYSIS Current Account Deficit Erodes Dollar Value By AGNES T. CRANE Of DOW JONES NEWSWIRES NEW YORK -- There's no getting around it: the current account deficit will drag the dollar down over the next year against its two major rivals, the euro and the yen. So say currency strategists at leading banks, who have substantially pared back their forecasts on the dollar from the last Dow Jones Newswires poll taken in September. According to the median estimate from the survey of 14 banks, the euro will be trading at $1.22 in one month, lower than the $1.2320 it currently fetches, but up steeply from the 12-month target of $1.17 expected just three months ago. Over the next three months, the euro will climb to $1.2450 and by the end of 2004 touch $1.30. Some analysts expect to see a mild correction to the December rally in the euro within a month. In what has been largely a one-way trade since the beginning of the month, the euro has jumped into record high territory of $1.2360 from $1.1994. The dollar, meanwhile, is poised to fall to Y107 within a month and Y105 over the next three months. The dollar currently changes hands around Y107.60. This time next year, the beleaguered currency is expected to fall to 100, the survey found. There are few true bulls to be found when it comes to the dollar as the combination of what most view to be unsustainable deficits in the U.S. and unattractively low interest rates dampen demand for all things green. "The real theme is the current account deficit and low interest rates," said Meg Brown, currency strategist at HSBC in New York. HSBC expects the Federal Reserve to keep short-term interest rates at their 45-year low of 1.0% throughout next year. The U.S. current account, which measures trade plus revenues from investment, is running a deficit equivalent to 4.88% of gross domestic product, a level that many believe has become unsustainable given the low yields in U.S. debt securities relative to other areas of the world. If foreign investment slows to the point where it no longer can fully finance the current account deficit, the dollar will weaken. In fact, the weight of U.S. financing needs is so great that even the capture of Saddam Hussein, former dictator of Iraq and the one of the most wanted men by the U.S. government second to Osama bin Laden, couldn't disrupt the gravitational pull of the current account. Alan Ruskin, director at independent researchers 4Cast in New York, said that's because the "underlying forces driving the dollar aren't political really." "It's a current account and financing problem...and highlighting that were the TIC data" released Monday from the U.S. Treasury, which showed capital inflows were inadequate during the month of October to finance the gap, he added. Could See Some Correction Net foreign inflows topped $27 billion in October, up sharply from the $4.2 trickle reported in September, but well below the more than $40 billion needed to fill the current account gap. According to Michael Woolfolk, currency strategist at Bank of New York in New York, net portfolio inflows had averaged $57 billion in January through September this year and $48 billion in 2002. Woolfolk, however, believes the overly bearish sentiment toward the dollar in today's market is driven primarily by speculators, or those who take a short term view of the market, and therefore, a short term rally in the dollar will push the euro back to $1.18 within a month. "While such pervasive negative sentiment may drive the euro to further record highs this week against the dollar, it will eventually have to give way to a short-term relief rally in the dollar," he said in research note to clients. "One potential trigger could be a year-end rally in the U.S. stock market." The euro has gained 17.3% against the dollar so far this year while the dollar has fallen 9.4% against the yen, with the bulk of that decline occurring after the watershed meeting of the Group of Seven industrialized nations in September that was read as a green light to investors to unload dollar positions. In a veiled criticism of Asian central banks that either peg their currencies or intervene in foreign exchange markets to weaken their currencies, the G7 called for "more flexibility" in foreign exchange "based on market mechanisms." Not all banks are so bearish on the dollar's longer-term fortunes. Citibank expects the euro to slip back towards $1.20 in twelve months time, while Nomura Securities predicts it falling to $1.15. Against the yen, J.P. Morgan expects the dollar to fall to Y95 in a year as does Goldman Sachs. Table Of Banks' Currency Forecasts EUR/USD In: 1-Mo 3-Mos 12-Mos 4Cast 1.2450 1.28 1.35 Bank of New York 1.18 1.23 1.30 Barclays Capital 1.23 1.30 1.18 BNP Paribas 1.19 1.20 1.30 Credit Agricole 1.22 1.23 1.30 Citibank 1.20 1.15 1.20 Deutsche Bank N/A 1.25 1.30 Goldman Sachs N/A 1.24 1.30 HSBC 1.23 1.27 1.35 JPMorgan Chase 1.22 1.25 1.30 Lehman 1.22 1.28 1.35 MG Financial 1.23 1.185 1.265 Nomura 1.25 1.30 1.15 UBS 1.20 1.22 1.32 MEDIAN 1.22 1.245 1.30 USD/JPY In: 1-Mo 3-Mos 12-Mos 4Cast 106 105 98 Bank of New York 105 103 100 Barclays Capital 107 103 100 BNP Paribas 105 103 98 Credit Agricole 107 106 100 Citibank 108 110 105 Deutsche Bank N/A 105 99 Goldman Sachs N/A 105 95 HSBC 107 103 98 JPMorgan 105 102 95 Lehman 107 105 100 Nomura 105 95 110 UBS 110 110 100 MEDIAN 107 105 100 (Jamie McGeever contributed to this report.) ---By Agnes T. Crane, Dow Jones Newswires, 201-938-2122; agnes.crane@dowjones.com URL for this article: djnewsplus.com