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To: Les H who wrote (11305)	10/25/2004 1:06:58 PM
From: Les H	Read Replies (1) \| Respond to of 29594

Greenback may dive 20-30% in two years UBS economist cites twin deficits and savings gap By LARRY WEE (SINGAPORE) The US dollar could be headed for a severe fall of 20 to 30 per cent in the next 12 to 24 months as the American economy's chronic imbalances continue to mount in size, a senior economic adviser of Swiss banking giant UBS has warned. Mr Magnus: The cracks in the US currency's fragile facade could start to show as soon as next year George Magnus said last Friday that US budget and current account deficits - which are already at a record 6 per cent of US GDP - look set to increase further, to between 8 to 10 per cent of US GDP. Meanwhile, US domestic savings as a percentage of national income has fallen to their lowest levels since the 1930s and, most importantly, compensating capital inflows from overseas may not be able to keep pace indefinitely. For example, he said: 'We've calculated that the rest of the world will have to grow three times as fast as the US just in order for the US deficits to stabilise.' The euro and Japanese yen should be at the forefront of beneficiaries from such a sharp US dollar slide, Mr Magnus suggested in a lunch-time address to the bank's wholesale clients in Singapore. 'Something has to give,' he said, if the US imbalances and investment-savings gap continue to grow, especially because the US has become too dependent on official inflows - particularly from Asian central banks. Net private sector inflows into the US have in fact turned negative on the equity and FDI (foreign direct investment) fronts - the latter by more than US$150 billion in the first quarter of 2004. If Mr Magnus is correct, a 20 per cent slide would take the greenback down towards 85 yen per US dollar, which compares with its all-time low of around 80 yen in mid-1995, and above 105 yen for most of 2004. The euro would, in turn, soar to more than US$1.50, compared to 2004's trading range of US$1.18 to US$1.29. A US$1.50 euro would be a record high for the European common currency, which was introduced in early 1999. In fact, the cracks in the US currency's fragile facade could start to show as soon as next year, said Mr Magnus, though the pace at which other Asian currencies appreciate versus the US dollar could depend on China's currency regime. In the shorter term, however, UBS does not expect China's fixed peg of 8.28 to the US dollar to change in any dramatic way in the coming year. UBS currently forecasts that, by the end of 2005, the US dollar could fall towards 105 yen, S$1.63 and 8.19 yuan, while the euro will rise towards US$1.40. Gold may not be the best hedge against further falls in the international value of the greenback, said Mr Magnus, as inflationary pressures are not likely to be a significant factor in the coming year. 'Better hedges against further US dollar weakness could be the euro, sterling pound, Swiss franc, and commodity currencies such as the Australian and Canadian dollars,' he told BT after the luncheon address.