US analysts tip dollar recovery
( 2001-08-19 14:02) (7)
The US dollar's dramatic slide is scaring Japan while giving temporary relief to some other Asian economies but the weakness is unlikely to last, experts say.
The US currency slid almost three percent against the euro in the past week, flirting with 92 cents Thursday before settling on Friday in New York at 0.9180 dollars, compared to 0.8930 a week earlier.
Against the Japanese currency, the dollar eased to 120.20 yen from 121.98 yen over the same period.
Traders punished the dollar as they wrung their hands while waiting for signs of a US recovery, experts said.
"The anticipated recovery for the second half of 2001 has not materialised and that timetable is being pushed out, and that is hurting the dollar," said Reusch International economist Alex Beuzelin.
But the outlook for the euro was limited by the euro-zone's slowing economy, while the yen's future would be capped by the threat of intervention ordered by the Ministry of Finance, he added.
"While concerns over longer-term capital flows have contributed to shifting sentiment towards the dollar, the principal driver of the dollar's recent decline appears to be mounting concern over the US recovery," said a report by Citibank's foreign exchange team.
"More specifically, the foreign exchange market is questioning the recovery scenario for the second half and punishing the dollar as a consequence," it said.
"We believe that the market is too pessimistic on the prospects for a US recovery and anticipate emerging evidence over coming months that the United States is on track for an upturn in the second half."
While the weakness had yet to run its course, a pullback in the euro's high value against the dollar was likely within three months, the Citibank economists said.
The yen's sharp appreciation, a threat to the world's second-biggest economy, which is already lurching towards recession, had frightened the Japanese authorities, the bank said.
"It is clear that the strengthening of the Japanese yen is inconsistent with Japanese fundamentals, which are clearly deteriorating," it said.
This had forced Japanese officials to try to limit the impact of a stronger yen on the economy. If the dollar weakened to the June low of 118.26 yen, "there is a strong risk that Ministry of Finance rhetoric will be backed up by foreign exchange intervention to weaken the yen."
Within Asia, Malaysia was likely to have breathed the biggest sigh of relief over the dollar's weakness, as the ringgit's dollar-linked strength had appeared to clash with a rapid slowdown in its economy.
"A sharp weakening of the international dollar and the associated trade weighted weakening of the ringgit would ease/eliminate devaluation concerns," the Citibank report said.
The lower dollar would also ease the debt-servicing burden on countries such as South Korea, it added.
"Since in every country but the Philippines the lion's share of the debt is dollar-denominated, a stronger local currency means a drop in the local currency value of debt and debt service," Citibank said.
"This is most beneficial to Korea, followed by Malaysia and Indonesia."
In the short term, the dollar is expected to trade in a tight range ahead of a meeting Tuesday by the Federal Open Market Committee (FOMC), which is widely expected to cut the federal funds rate by 25 basis points to 3.5 percent.
"I do not expect much to happen if the FOMC were to cut rates by 25 basis points, a move largely anticipated by markets," said Foreign Exchange Analytics currency analyst David Gilmore.
"Obviously, the wording accompanying the Fed's action will be closely watched," he said.
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