Sun, Aug 05, 2001 - Page 10 News List

US dollar's surge may have peaked


The dollar's bull run may be over as demand for US assets wanes, say Deutsche Bank AG, JP Morgan Chase & Co and Morgan Stanley Dean Witter & Co -- which together handle about 22 percent of global currency trading.

"US yields are among the lowest in the world right now, and the dollar is the most overvalued of the major currencies, so on those grounds it makes sense" to sell dollars, said Michael Rosenberg, head of foreign exchange at Deutsche Bank, which handles 9 percent of the world's US$1.1 trillion-per-day foreign-exchange business.

Demand for the currency from European companies acquiring US businesses, along with net foreign investment in US stocks and corporate bonds, helped power the dollar to a 15-year high a month ago against a basket of six other leading currencies. It has since declined 4 percent, from 121.02 on July 6 to 116.10, as disillusion mounted that a US economic rebound will come in time to sustain the currency's strength.

Flows from the euro zone to buy US companies so far this year are 67 percent lower than they were for the same period in 2000, when European companies drove a net US$135 billion into the world's biggest economy at the expense of the euro region. In July US$420 million more left the US to buy companies in the 12-nation euro region.

"Capital outflows to the US from euro-land are running at a lower pace," damping demand for dollars, said John Kyriakopoulos, a currency strategist at JP Morgan Chase in London. Further hurting the currency, "in the third quarter, the message will be a delayed recovery in the US," he said.

The dollar has fallen four straight weeks against the euro, its longest stretch of losses this year, to as low as US$0.8873 per euro on Friday. It traded at ?123.66, little changed from ?123.53 last week.

JP Morgan expects the dollar to fall to US$0.91 by the end of the quarter. Deutsche's Rosenberg forecasts that the dollar will fall to US$0.90 per euro this quarter and to US$0.95 by the end of the year. Morgan Stanley calls for a drop to US$0.90 in coming weeks.

At the core of these calls is skepticism the US economy will rebound later this year, as many economists had predicted.

Instead, reports this week showed US business other than manufacturing unexpectedly contracted in July, manufacturing shrank for a 12th straight month, and consumer confidence fell. Last week, the government said the economy grew at the slowest pace in eight years from April to June.

Unless economic statistics in coming months show a marked pickup in US growth, the investment flows that have fueled demand for dollars may ebb, some analysts say.

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