12-13-2004, 05:18 AM
2005: Year of the weak dollar
2 hours, 31 minutes ago
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WASHINGTON (AFP) - The Americans may be playing a dangerous game in letting the dollar slide, some analysts say, and 2005 could be the year of reckoning.
Since a recent peak in May 2004, the dollar has plummeted 12 percent against the euro, and the trend is unlikely to change.
"The dollar slide that began in 2002 is likely to continue, especially if, as we expect, the US current account deficit (the broadest measure of the trade gap) hits a new record and US capital outflows pick up," said Citigroup chief economist Kermit Schoenholtz.
In effect, the deeper the trade deficit, the more the US economy goes into debt. To narrow the shortfall, either the dollar must slide or interest rates on US investments must rise to lure investors.
In 2003, the current account deficit broke above 500 billion dollars for the first time.
In 2004, it is set to reach a new record.
For the US economy, the dollar slide is not all bad. "Made in USA" exports are now comparatively cheaper for foreigners, supporting production in the United States.
US President George W. Bush (news - web sites)'s administration is broadly believed to be deliberately allowing the dollar to go with a policy of benign neglect, repeating a mantra-like support for a "strong dollar policy" while also stressing that the open markets must decide its value.
The strategy has been viewed by the markets as clearance to sell.
But it is a risky game.
"The latest down-leg in the US dollar, a trend expected to continue into the second quarter of next year, is likely to provide some positive offsets, though not as much as in 2003 and 2004," said Merrill Lynch economist Ron Wexler.
US companies in the Standard and Poor's 500 index are likely to boost operating earnings per share by only 4.2 percent next year, Wexler forecast, compared with an estimated gain of 21.6 percent in 2004.
Other countries, the US trading partners, will be increasingly punished next year by the weak dollar, which crimps their exports, slows economic activity and reduces their capacity to buy from the United States.
If foreigners grow weary of the situation, the possibility of a flight out of dollars cannot be excluded, said Morgan Stanley chief economist Stephen Roach, a renowned bear.
"Nor can I dismiss the possibility that the world flinches, with Japanese and European authorities intervening in foreign exchange markets," Roach said.
"Depending on the degree of intervention, it is possible that the dollar's depreciation could be aborted or even go the other way. Should that occur, current-account adjustments will come to a standstill -- thereby perpetuating America's persistently large trade deficit and stoking protectionist sentiment in the US."
Equally worrying would be a unilateral Asian intervention. "In that case, Europe would continue to bear the brunt of a falling dollar, heightening the possibility of trade frictions between Europe and Asia," he said.
Furthermore, the dollar's decline raises pressure on the Federal Reserve (news - web sites) to increase interest rates, lifting the cost of credit and risking an economic slowdown.
The big worry for 2005 in a climate of rising rates could be the booming housing sector. A few analysts say the sector may be in a bubble, though most -- notably Federal Reserve chairman Alan Greenspan (news - web sites) -- disagree.
"The nation's economic growth in 2005 will be more moderate than in 2004," predicted the Federal Reserve Bank of Chicago, which envisions gross domestic product (GDP (news - web sites)) growth slowing to 3.3 percent next year from a likely 4.4 percent in 2004.
But some analysts see a brighter horizon.
"Several factors support the view that the recovery will sustain a cruising speed of four percent or better in 2005," Citigroup chief North American economist Robert DiClement said, citing rising productivity, a still-accomodative interest-rate policy and a gain in net jobs, which should boost household incomes.
Wachovia Economics Group analysts, however, cited "one economic and two political risks" ahead.
The possiblity of rising inflation was the economic risk.
A re-evaluation of China's yuan-dollar link was a political concern, they said in a report.
The other political risk was the reform of Social Security (news - web sites), which is vastly underfunded in relation to the entitlements promised to retirees.
"Failure to address the issues of entitlement reform could prove catastrophic for the long-term viability of the US economy," Wachovia economists warned.
2 hours, 31 minutes ago
Add to My Yahoo! Top Stories - AFP
WASHINGTON (AFP) - The Americans may be playing a dangerous game in letting the dollar slide, some analysts say, and 2005 could be the year of reckoning.
Since a recent peak in May 2004, the dollar has plummeted 12 percent against the euro, and the trend is unlikely to change.
"The dollar slide that began in 2002 is likely to continue, especially if, as we expect, the US current account deficit (the broadest measure of the trade gap) hits a new record and US capital outflows pick up," said Citigroup chief economist Kermit Schoenholtz.
In effect, the deeper the trade deficit, the more the US economy goes into debt. To narrow the shortfall, either the dollar must slide or interest rates on US investments must rise to lure investors.
In 2003, the current account deficit broke above 500 billion dollars for the first time.
In 2004, it is set to reach a new record.
For the US economy, the dollar slide is not all bad. "Made in USA" exports are now comparatively cheaper for foreigners, supporting production in the United States.
US President George W. Bush (news - web sites)'s administration is broadly believed to be deliberately allowing the dollar to go with a policy of benign neglect, repeating a mantra-like support for a "strong dollar policy" while also stressing that the open markets must decide its value.
The strategy has been viewed by the markets as clearance to sell.
But it is a risky game.
"The latest down-leg in the US dollar, a trend expected to continue into the second quarter of next year, is likely to provide some positive offsets, though not as much as in 2003 and 2004," said Merrill Lynch economist Ron Wexler.
US companies in the Standard and Poor's 500 index are likely to boost operating earnings per share by only 4.2 percent next year, Wexler forecast, compared with an estimated gain of 21.6 percent in 2004.
Other countries, the US trading partners, will be increasingly punished next year by the weak dollar, which crimps their exports, slows economic activity and reduces their capacity to buy from the United States.
If foreigners grow weary of the situation, the possibility of a flight out of dollars cannot be excluded, said Morgan Stanley chief economist Stephen Roach, a renowned bear.
"Nor can I dismiss the possibility that the world flinches, with Japanese and European authorities intervening in foreign exchange markets," Roach said.
"Depending on the degree of intervention, it is possible that the dollar's depreciation could be aborted or even go the other way. Should that occur, current-account adjustments will come to a standstill -- thereby perpetuating America's persistently large trade deficit and stoking protectionist sentiment in the US."
Equally worrying would be a unilateral Asian intervention. "In that case, Europe would continue to bear the brunt of a falling dollar, heightening the possibility of trade frictions between Europe and Asia," he said.
Furthermore, the dollar's decline raises pressure on the Federal Reserve (news - web sites) to increase interest rates, lifting the cost of credit and risking an economic slowdown.
The big worry for 2005 in a climate of rising rates could be the booming housing sector. A few analysts say the sector may be in a bubble, though most -- notably Federal Reserve chairman Alan Greenspan (news - web sites) -- disagree.
"The nation's economic growth in 2005 will be more moderate than in 2004," predicted the Federal Reserve Bank of Chicago, which envisions gross domestic product (GDP (news - web sites)) growth slowing to 3.3 percent next year from a likely 4.4 percent in 2004.
But some analysts see a brighter horizon.
"Several factors support the view that the recovery will sustain a cruising speed of four percent or better in 2005," Citigroup chief North American economist Robert DiClement said, citing rising productivity, a still-accomodative interest-rate policy and a gain in net jobs, which should boost household incomes.
Wachovia Economics Group analysts, however, cited "one economic and two political risks" ahead.
The possiblity of rising inflation was the economic risk.
A re-evaluation of China's yuan-dollar link was a political concern, they said in a report.
The other political risk was the reform of Social Security (news - web sites), which is vastly underfunded in relation to the entitlements promised to retirees.
"Failure to address the issues of entitlement reform could prove catastrophic for the long-term viability of the US economy," Wachovia economists warned.