The US dollar may cede ground gained in this week's rally, its best in four months, as money managers conclude the Sept. 11 terrorist attacks have dimmed US growth prospects and raised the need to invest in other nations.
The US currency is down about 5 percent since the first week of July against an index of six major currencies, including the euro and yen, even after rounding out its sharpest weekly gain since May.
"The US just doesn't really look like it's the best deal in town right now," and some investors want to diversify into other major economies, said Laurie Cameron, head of global foreign exchange at JP Morgan Chase & Co's private bank.
This week the dollar gained 0.7 percent versus the six- currency index, paced by a rebound in US stocks. Enthusiasm over the US currency and stocks was tempered yesterday, when a report showed retail sales fell a greater-than-anticipated 2.4 percent last month, increasing expectations for a recession.
The dollar fell yesterday to US$0.9115 per euro, from US$0.9023 in New York late Thursday, to US$1.4530 per British pound from US$1.4446, and to SF1.6257 from SF1.6448.
Cameron, who said her unit will trade about $10 billion in currency this year, plans to buy Swiss francs and British pounds.
Switzerland, with political neutrality and a current-account surplus, is among the safest destinations for investors, and the UK has "the best growth prospects in Europe," Cameron said. She wants to wait for the currencies to cheapen before she buys -- the franc to weaker than SF1.65 per dollar and the pound to below US$1.44.
Cameron and some other currency analysts said their concerns about the economy weren't allayed by a report on Friday that US consumer confidence unexpectedly rose this month. They're still worried shoppers will cut back on their spending, which accounts for about two thirds of the nation's output.
The US probably shrank at a 0.6 percent annual rate in the quarter ended last month, say economists. What's more, the Federal Reserve's nine interest-rate cuts this year, and plans by the Bush administration to boost spending and cut taxes may not turn the economy around until next year, analysts say.
"The US may come out of a recession first, but it won't return to the rate of growth it had" in recent years, said Dale Thomas, a director at Rothschild Asset Management in London, which oversees about US$43 billion in assets.
"The growth differential over Europe will be smaller -- the dollar won't have the strength it used to."
The history of the last US recession, in 1990, also shows that the dollar, and the level of foreign investment, may have further to fall. As the world's biggest economy slowed in 1990, the dollar sank for eight straight months, its longest series of declines in the past 15 years.
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