Foreign investors' willingness to send funds to the US has waned since early August, a sign the dollar may fall in coming weeks, according to JP Morgan Chase & Co.
"In a risk-averse environment, capital tends to stay home and the dollar doesn't perform well," said Larry Kantor, co-head of foreign-exchange research at JP Morgan Chase, the second-biggest US bank.
A bank index that measures investors' appetite for risk, the liquidity and credit premia index, has signaled since Aug. 2 that foreign investors are more inclined to keep their money home than shift it to the US. In that period, the dollar has lost 3.4 percent against both the euro and the yen.
The index, which measures such gauges of the appetite for risk as bond and swaps spreads and currency market volatility, "has a high correlation with currency moves," said Kantor.
"After the start of the year, with the Fed beginning to lower interest rates, people were risk-seeking" and moved investments into the US, powering the dollar higher, he said.
Against a basket of the euro, yen, British pound, Swiss franc, and the Canadian and Australian dollars, the dollar rose to a 15-year high on July 6 of 121.02, as money flowed into the world's largest economy. Since then, the dollar has slid 6.4 percent.
The US currency's half-percentage point gain against the euro since last Friday was its first rise in seven weeks. It traded at 91.31 per euro and little changed at ?120.05. The recent string of six weekly declines was the dollar's longest drop since the period from late November to early January, when JP Morgan's LCPI index also had a risk-averse score.
A quarter-point interest-rate reduction by the Federal Reserve on Tuesday and the central bank's statement that the US economy may stay weak also dimmed demand for the currency, analysts said.
Optimism is ebbing for a pickup soon in the US economy. The government is expected to say on Wednesday that growth was flat in the second quarter, compared with previous estimates of a 0.7 percent expansion rate.
Meantime, a report yesterday showed growth in Germany, the euro region's largest economy, was unchanged in the April-June quarter, and economists expect Japan's economy probably shrank 0.8 percent.
Fed policy makers have lowered the US benchmark lending rate to 3.5 percent in seven moves this year totaling 300 basis points. According to yields on Fed funds future contracts, they aren't likely to cut by more than another 25 basis points this year to fuel the economy.
"The combination of the Fed slowing the pace of rate cuts and the fact the world economy is not as rosy as people thought it would be in the second half of the year -- that has damped risk appetite," said JP Morgan's Kantor.
Unless evidence of a growth rebound builds soon, sentiment toward the dollar will continue to decline, wrote Neil MacKinnon, senior global currency strategist at Merrill Lynch International in London, in the bank's currency outlook.
Merrill Lynch, which previously looked for the dollar to sink to US$0.92 per euro in the third or fourth quarters of this year, now says it will likely move to the US$0.9595 level in the period.
"Our short-term strategies for the next one to three months continue to favor taking advantage of projected weakness in the US dollar," MacKinnon said.
The US currency is especially vulnerable to changes in global investors' perceptions because the nation has the largest current-account deficit in the world.
The current-account shortfall represents money the US has to borrow overseas to pay for all the goods and services Americans import and to finance investment not covered by US savings. It ballooned to a record US$116.3 billion in the fourth quarter before narrowing to US$109.6 billion in the first.
Foreign investment flows in 2000 ``nearly could have financed the US current-account deficit on its own,'' the International Monetary Fund said in its July report.
"The United States continued to absorb the lion's share of global capital flows, attracting 64 percent of world net capital exports," with more than a net US$400 billion coming in, the IMF said.
"The US is the 500-pound gorilla in terms of current account imbalance," said Kantor at JP Morgan. Now, "these flows are slowing and the dollar is falling as a result."
The investment flow data "helps confirm that capital flows have been driving dollar weakness," said Robert Sinche, head of global currency strategy at Citibank, the world's largest foreign-exchange bank, with a 9.7 percent share of the US$1.1 trillion-per-day currency business.
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