The war in Iraq may be all but over, but the gloom weighing on the dollar is unlikely to lift as investors focus on the US' current account and budget deficits, analysts said.
Cautious about the outlook for stocks, bonds and other securities denominated in dollars, investors are taking advantage of easing geopolitical risks by moving from dollar assets into emerging markets, they said.
"The bear market grip seems unlikely to break until institutions feel confident enough on the [US] outlook to buy, not sell," Steve Pearson, head of currencies at HBOS Treasury Services said.
"This is probably dependent on a coincidence of better earnings and fundamentals," he added.
The reluctance to take on US exposure with the backdrop of an uncertain economic recovery and record deficits has overwhelmed any positive factors for the dollar from the conclusion of the Iraq war.
West LB currency strategist Michael Klawitter said that such concerns were keeping the dollar from capitalizing on the little good news out of the US, notably better-than-expected first-quarter earnings from technology companies and banks -- among them IBM, Microsoft and Bank of America and Citigroup.
In the past four weeks, euro-zone equities have outperformed Wall Street. Funds are also seeking out "spectacularly high" returns in emerging markets, Klawitter said.
"The key is that in a world where risk aversion is declining post-Iraq, institutions are willing to diversify away from dollar-based assets," he added.
But even with the end of the war against Iraq at hand, the level of uncertainty about the outlook for US growth remains high.
"Concerns about the financing of the current account and budget deficit dominate the underlying dollar sentiment," Klawitter said.
Pearson of HBOS pointed to a survey of fund managers survey for April by US investment bank Merrill Lynch, which found that 53 percent of global fund managers now think the dollar is overvalued, up from 38 percent in March.
Analysts also doubted the dollar was likely to benefit much from the pricing of Iraqi oil in dollars again after several years of it being priced in euros in defiance of US economic power.
Michael Rothman, senior energy market specialist at Merrill Lynch said: "Iraq's decision to price its oil in euros rather than dollars was a reaction to resentment about the oil-for-food deal."
He said that Iraq had been the only country to switch its oil pricing away from dollars and doubted that the move had ever been seen as a serious example to be followed by others.
Pearson at HBOS said: "In terms of transactional demand for dollars, the Iraq numbers are pretty small when compared with daily turnover in the spot [physical oil] market, which is about US$1 trillion. A couple of hundred million dollars would be a drop in the ocean."
But Marc Chandler, chief currency strategist at HSBC, noted some market concern over recent reports from Indonesia that the state oil company, Pertamina, is considering using the euro instead of the dollar in its oil and gas trades.
He said there was "some worry that this is simply the tip of the iceberg and that the combination of the weak US economy, concerns about the reliability of US accounting, the kind of crony-capitalism thought to be reflected in some of the early commercial contracts in Iraq, and the diplomatic fallout from the unpopular war against Iraq, on top of the so-called twin deficits, will undermine the international role of the dollar."
However, Chandler conceded that such concerns are likely to prove exaggerated.
"Market observers often show a penchant for explaining short-term price action on long-term structural shifts," he said.
The US government's budget deficit totaled US$58.7 billion in March, adding to the shortfall created so far in fiscal 2003 amid a weak economy and increased defense spending.
The US Treasury said the deficit compared with US$64.8 billion in March 2002 and US$50.7 billion in March 2001. The government records deficits during the month because it mails out tax refunds.
President George W. Bush has estimated a record annual shortfall of more than US$300 billion this fiscal year, not counting war costs. The deficit may be even larger once the costs of war and defense measures are included.
"The Treasury is hemorrhaging red ink, largely because a weak economy and slumping equity markets have depressed revenues while waging the wars on terrorism and Iraq have boosted outlays," said Steven Wood, principal economist at Insight Economics in Walnut Creek, California.
Economists had expected a deficit of US$55 billion, based on the media forecast of 39 economists in a Bloomberg News survey.
For the first six months of this fiscal year, which started Oct. 1, the Treasury reported a deficit of US$252.6 billion, compared with a shortfall of US$131.9 billion during the first six months of fiscal 2002. After four years of surpluses, the US posted a deficit of US$157.8 billion for fiscal 2002. The highest annual deficit ever was US$290.4 billion in 1992.
Revenue in March rose to US$120.4 billion, up 8.2 percent from a year earlier, and spending was US$179.1 billion, 2.1 percent higher than March 2002, according to the Treasury.
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