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Dollar may move higher next week

The dollar rebounded this week to levels seen before the Sept. 11 terrorist attack, and it may rally further on expectations the US economy will recover before Europe's or Japan's, analysts said.

"Any economic rebound is much more likely to come from the US than elsewhere, and it all bodes pretty well for the dollar," said Paul Podolsky, chief currency strategist at Fleet Global Markets in Boston. "There isn't a compelling argument to put your money anywhere else in the world."

The dollar posted gains as investors focused on Europe's weaker-than-forecast economic figures and an expected recession in Japan, rather than at least eight anthrax infections and a threat of more terrorist acts in the US, analysts said.

The US currency strengthened 1.4 percent to US$0.8992 per euro from US$0.9115 a week earlier, its fourth advance in five weeks.

Podolsky expects the dollar to push towards US$0.8830 per euro next week.

Against a trade-weighted index of the euro, yen, British pound, Swiss franc, Swedish krona and Canadian and Australian dollars, the US dollar rose this week to 104.4, its highest level since Sept. 6. It was little changed at ?121.20.

The government's efforts to shore up growth ``will lead to a favorable turn in the economy next year,'' and in the meantime, investors are reluctant to pull money from the US, said Michael Rosenberg, head of foreign exchange research at Deutsche Bank.

By the end of September, some fund managers raised their dollar exposure to 5.9 percent above their benchmark levels, the most bullish stance on the dollar since March, according to Deutsche Bank. The bank handles 9.1 percent of the US$1.2 trillion-per-day currency market, ranking it second behind Citibank.

The dollar has strengthened 3.6 percent against the euro from a six-month low of 93.31 on Sept. 17, as the Federal Reserve reduced its benchmark interest rate by one percentage point to 2.5 percent, the lowest level in almost 40 years.

"The US is using its policy flexibility, both monetary and fiscal," to bolster the economy, said Robert Sinche, head of global currency strategy at Citibank. "The markets are re-assessing what the magnitude of policy stimulus implies for growth prospects on a medium-term basis," and that's kept demand for dollars intact, he said.

After nine interest-rate cuts this year, St. Louis Fed President William Poole said Thursday the central bank stands ready to move again if the US economy continues to flounder.

At the same time, the US House of Representatives is crafting a plan to cut taxes and increase spending by US$100 billion to spur growth.

One source of support for the dollar against the euro -- investment flows from purchases of US companies -- has also increased. A net US$13 billion flowed into the US from Europe in the six weeks after the attacks, up from US$4.5 billion in the six weeks before Sept. 11.

Direct investment from abroad is an important support for the dollar, said Fleet's Podolsky. In July and August, when there was a net outflow from the US to the dozen euro nations, the trade-weighted dollar fell 0.8 percent and 2.4 percent, respectively.

Weakening economic indicators in Europe are preventing the euro from regaining ground from the US currency, analysts said.

"What you have is a downturn everywhere," said Deutsche's Rosenberg. "If the US downturn were independent from the rest of the world, the dollar would be more vulnerable."

The euro dropped below US$0.90 yesterday, after the Ifo institute index of business confidence among 7,000 German companies sank to 85 in September from 89.5 in August. That compares with forecasts of 88.4 and is the most pessimistic level in almost eight years, in a country that comprises a third of the euro-zone's economy.
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