tek, don't bother to get WSJ. I used to preach against posting c-righted stuff. But once in a while I find such good articles, I can't help it. I have an academician in me. -g-
From today's WSJ:
November 4, 1997
Dollar Outlook: Best Has
Come and Gone, Some Say
By MICHAEL R. SESIT
Staff Reporter of THE WALL STREET JOURNAL
LONDON -- The global stock-market turmoil and Asian-currency crisis
are knocking out one prop after another from under the dollar in trading
against major European currencies.
Big investors are unwinding "long-dollar" positions, or bets the U.S.
currency will rise. Traders are taking profits and talking about sitting out
the rest of the year. Some analysts are worrying that the Asian crisis could
spread to Latin America. Some fear that Japanese investors will repatriate
cash to shore up damaged balance sheets at home.
"The highs for the dollar are behind us, and the downtrend is already under
way," says Avinash Persaud, head of currency research for J.P. Morgan
& Co. in London. He predicts that by the end of 1998, the dollar will be
trading at about 1.55 marks, or about 11% below current levels.
When the dollar falls against European currencies, it makes U.S. goods
more competitive and helps cushion U.S. investors' losses in Europe's
stock markets. But analysts warn that it also exposes America's Achilles'
heel: the country's dependence on foreign cash to finance its huge
balance-of-payments deficit.
Insufficient Savings
"Because Americans don't save enough, the U.S. -- as the world's biggest
debtor -- needs the combination of a cheap dollar and relatively high
interest rates to suck in overseas capital," says Kit Juckes, an international
economist at NatWest Markets in London. He predicts the dollar will fall
"erratically and slowly" to below 1.70 marks before year end and below
1.60 marks next year.
During the past few days, the dollar has stabilized on the improved
performances of world stock markets. Monday, it was also buoyed by
worries about U.S.-Iraqi tension centering on Iraq's barring U.S. weapons
inspectors. Still, the U.S. currency remains more than 8% below its August
eight-year peak against the mark and four-year high against the Swiss
franc. (More on the possibly improved outlook for the Hong Kong dollar,
Heard on the Street.)
Many traders, investors and analysts had expected the dollar to be 10% to
15% higher than it is against many major European currencies. The bullish
scenario was based on two supports: rising U.S. interest rates, which often
increase the dollar's allure to international investors, and forecasts of a
weak euro, the common European currency planned for 1999. Weak euro
prospects make European currencies less attractive.
Perception of Weak Euro Fades
But amid the stock-market turmoil, few economists now expect the
Federal Reserve to raise rates soon. Meanwhile, "the market's perception
of the euro is changing," says Mr. Persaud. "It hasn't bought a strong-euro
scenario, but its perception of a weak euro is fading."
Despite Monday's rallies in Hong Kong and other Asian shares, part of
which was attributed to coordinated intervention by Japan, Singapore and
Indonesia to buoy the rupiah, many investors are skeptical that calm has
returned to world markets. One sign is the dollar's inability to stay above
the 1.74-mark level Monday -- despite Wall Street's strong performance
-- and the fact that the Swiss franc remains the haven of choice.
"The threat of continued instability in global financial markets is bearish for
the dollar," says Paul Meggyesi, a senior currency strategist at Deutsche
Morgan Grenfell in London. "The U.S. dollar may be a safe haven from
political instability, but it is clearly not a haven from financial market
instability."
One reason is that during times of turmoil, investors become more risk
adverse. "There's no escaping the fact that the safest place for money for
any investor is his home cash or government securities market," says
NatWest's Mr. Juckes.
That translates not only into fewer investors seeking dollar assets but also
less financing for investors who do want dollar exposure. "Investors who
borrow funds to make leveraged dollar investments are finding it more
difficult to borrow," says Gary Evans, chief global emerging-market-debt
strategist at UBS Securities Inc. in New York.
Another reason to expect instability is America's dependence on foreign
capital to finance its enormous current-account deficit, which Mr.
Meggyesi predicts will expand to $160 billion this year from $148 billion in
1996. When markets are volatile and investors run scared, he says, the
most vulnerable currencies "are those of countries that have an ongoing
financing requirement."
Debt of $1.2 Trillion Cited
And Uncle Sam's is huge: America's estimated net external debt -- what
Americans owe foreigners -- of $1.2 trillion is roughly 15% of its total
economic output. By contrast, the rest of the world owes Switzerland an
amount equal to 130% of its gross national product, Japan about 23% and
Germany 9%. Analysts say this explains why the dollar has weakened, the
German and Swiss currencies have risen and the yen has performed better
than expected.
"The U.S. is clearly reliant on a continued presence of foreign investors
and, more important, a continued inflow of foreign capital," says Mr.
Meggyesi.
If speculators force Latin American countries such as Brazil and Argentina
to shrink their own current-account deficits, America's will widen further,
making the U.S. even more dependent on foreign cash, warns Mr. Evans
of UBS.
"The market perceives that Latin America is more important to U.S.
economic health than Asia," says J.P. Morgan's Mr. Persaud. "And
perhaps more important, the market perceives that the U.S. is morally or
financially compelled to assist its Latin American neighbors as it did
Mexico in 1994 and 1995." During that support in early 1995, the dollar
fell to post-World War II lows against the mark, Swiss franc and yen.
The issue isn't whether Washington can fund its deficit; it's at what price.
"Someone will always buy the dollar, but we need a price concession
either in the form of higher interest rates or a lower currency," says
NatWest's Mr. Juckes. |
