"22.4% USD in 3-6 mths T-bills?" Much-maligned dollar may be poised for rebound
By Min Zeng Bloomberg NewsPublished: December 3, 2007
NEW YORK: At a time when billionaire investors like Warren Buffett and Bill Gross want nothing to do with the dollar, a growing number of strategists say the stage is being set for a rally in 2008.
The U.S. budget and trade deficits are narrowing in tandem for the first time since 1995, when the dollar gained 8 percent as measured by the Federal Reserve's U.S. trade weighted dollar index. The economy will expand 2.4 percent in 2008, compared with 1.9 percent for Europe, according to surveys conducted last month by Bloomberg News.
"I am confident that the dollar will have a significant rally next year, especially against the euro and the pound," said Stephen Jen in London, the head of currency research at Morgan Stanley. Jen said that he expected the U.S. currency to strengthen to $1.35 against the euro by December 2008 from $1.4633 last week. "The deficits are shrinking fast."
While prominent investors like Buffett and Gross say that investing in U.S. financial assets is a losing proposition as the country's economic and political dominance wanes, improvements in the deficits may provide a respite for the dollar after it tumbled 12 percent this year. Buffett is chairman of Berkshire Hathaway, while Gross manages the world's largest bond fund as chief investment officer of PIMCO, or Pacific Investment Management in Newport Beach, California.
The currency may appreciate 7 percent against the euro in 2008 from a record low of $1.4967 reached Nov. 23, according to the median forecast of 38 strategists polled by Bloomberg.
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Deutsche Bank, the world's largest currency trader, said it expected the dollar to rise 4.3 percent. Royal Bank of Scotland Group reversed its outlook last week and predicted the dollar would appreciate.
A depreciating dollar has helped U.S. exports rise to records in each of the past seven months, the longest streak since 2000. The trade deficit narrowed to $56.5 billion in September from a record $67.6 billion in August 2006, according to the U.S. Commerce Department.
Both President George W. Bush and Treasury Secretary Henry Paulson Jr. have hailed exports as a bright spot in an economy that is mired in the worst housing slump in 16 years. A narrowing deficit means that fewer dollars are being converted to foreign currencies through trade.
The budget deficit for fiscal 2007 ended Sept. 30 shrank to $162.8 billion, according to U.S. Treasury data. It is the smallest shortfall since $158 billion in 2002, and down from $413 billion in 2004.
"The twin deficits have been feeding a bearish dollar market over the past few years," said Michael Malpede, an analyst in Chicago at MF Global, the world's largest broker of exchange-traded futures and options. "If the deficits continue to show improvement, they will definitely take some heat off the dollar."
The dollar posted its largest weekly gain since August versus the euro, rising 1.38 percent, after the Federal Reserve chairman, Ben Bernanke, signaled that he might lower interest rates for a third time since September to bolster growth, reducing concerns about recession. It strengthened 2.5 percent last week versus the yen, its biggest increase since the week ended July 1, 2005.
Among the 38 securities firms surveyed over the past month, the only ones predicted a further decline for the dollar next year are Citigroup, Merrill Lynch, ABN AMRO, the investment-banking unit of Bank of Nova Scotia, and Standard Bank in London. They each see the dollar depreciating to at least $1.47 per euro.
"Even if the current-account deficit would get smaller, it is still very difficult for the U.S. to finance it" with interest rates falling, said Greg Anderson, an analyst in Chicago for ABN AMRO of Amsterdam. He said that the dollar might drop to $1.53 by the end of 2008. The current account is the broadest measure of trade.
Both Buffett and Gross, who Forbes says is worth $1.2 billion, have said they are bearish because interest-rate cuts by the Fed dim the allure of U.S. assets.
Even popular culture reflects the disillusionment with the dollar. In a recently released video for the movie "American Gangster," the hip-hop musician Jay-Z flashes a wad of €500 notes, not dollars, while driving through New York.
The dollar lost 40 percent of its value against the euro during its five-year slide as widening deficits raised concern over the capability of the United States to attract foreign money.
The former chairman of the Federal Reserve, Alan Greenspan, warned in November 2004 that overseas investors eventually would tire of funding the current-account gap and might channel money into other currencies.
The Fed is the only major central bank in the Group of Seven to cut interest rates this year, dropping its target from 5.25 percent since September to 4.50 percent now.
The European Central Bank and the Bank of England held rates unchanged at 4 percent and 5.75 percent, respectively.
"The Fed has done a lot of work relative to other central banks," said Adam Boyton, a senior currency strategist in New York at Deutsche Bank.
Boyton said that he expected the dollar to strengthen to $1.40 per euro. "2008 is going to stop the one-way story we have seen," he said.
The median forecast of strategists is for a 5 percent gain to $1.40 against the euro in 2008. RedTower Research, a market analysis firm in Aberdeen, Scotland, is the most bullish, calling for the dollar to gain to $1.23 per euro by the end of next year.
Jim O'Neill, chief economist in London at Goldman Sachs Group, the most profitable securities company, said last week that the narrowing trade deficit will help revive the dollar's allure. Goldman had predicted that the dollar would weaken as U.S. growth slowed while the rest of the world expanded.
Lower rates may work to the dollar's advantage by stimulating growth, said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon, the world's largest custodial bank, with over $20 trillion in assets. The European Central Bank and Bank of England may have to cut borrowing costs as their economies feel the pinch of previous rate increases, putting pressure on the euro and the pound, he said.
"The U.S. economy will recover," Woolfolk, who is based in New York, said. "The financial sector will begin to show signs of recovery. The dollar will continue to stabilize and even rebound." |
