The US dollar's rally to a six-month high against the euro will end as demand for US assets from foreign investors wanes, Lehman Brothers Holdings Inc said in a research report dated May 12. The firm advised increasing bets the US currency will drop versus the yen.
The US dollar last week rallied for a third week versus the euro and had the biggest weekly gain against the yen in more than four months as US reports showed a narrower trade deficit and greater than expected retail sales.
"Data flow has turned more dollar-supportive, yet we believe the dollar will ultimately depreciate further as a result of a weak capital flow picture,'' James McCormick, the firm's London-based head of global currency research, said in a report yesterday.
Investor appetite for US corporate bonds and stocks will probably decline, McCormick said. Standard & Poor's cut the credit rating of the two-largest US automakers, Ford Motor Co and General Motors Corp, to junk-bond status on May 5. "On the capital-flow front, we believe that the picture is unlikely to remain supportive," he said.
Lehman, the fifth-largest US securities firm, expects the US dollar to decline to US$1.40 per euro and 90 yen by year-end.
In Asia, expectations are that Chinese policy makers will let their currency trade more freely and this will benefit other Asian currencies, McCormick said. China has pegged the yuan at about 8.3 per US dollar for a decade.
"The long-awaited yuan revaluation continues to frustrate even the most patient investor, but our advice is to stick with the bullish Asian currency view," McCormick wrote. "Once the regime change finally occurs, we believe this will set the stage for wide-ranging foreign-exchange appreciation in Asia."
Lehman said that investors should maintain bets on an advance in the currencies of Thailand, Taiwan, Singapore and South Korea versus the US dollar and the euro.
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