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Analysts hoist red flag over greenback

Currency watchers look into the new year, and see more selling pressure on the US dollar

By LARRY WEE

(SINGAPORE) The US dollar will face more selling pressure in the early months of 2008, say traders and strategists. And the greenback’s losses could even accelerate against its most favoured Asian counterparts – despite a possible rebound elsewhere later in the year.

Despite having tumbled to its worst levels in 10 years or more against currencies like the Singapore dollar in 2007, forecasters warn that the greenback could fall even further to fresh lows, like 6.6 Chinese yuan and S$1.34, by the end of 2008.

Even less aggressive forecasts expect it to end the coming year weaker, at somewhere between 6.7 and 6.85 yuan and between S$1.37 and S$1.40 – compared to 7.3 yuan and S$1.44 at the close of 2007.

Barclays Capital researchers, who made the S$1.34 forecast for end- 2008, expect local inflation to peak at more than 5 per cent in the first half of 2008 – compared to the current official forecast of 3.5 to 4.5 per cent for the whole year.

This, they explain, will encourage the Monetary Authority of Singapore to maintain a tightening bias despite any concerns about slower global growth in 2008.

Elaborating, they add: ‘We project a current account surplus of US$46.9 billion (24.6 per cent of GDP) and net FDI inflows of US$7.5 billion (3.9 per cent of GDP). Net portfolio outflows will recycle only part of the surplus, leaving the Monetary Authority of Singapore to accumulate further foreign currency reserves.’

And, in the bigger picture, DBS researchers warn: ‘On a 12-month rolling basis, net purchases of US long-term securities by foreigners have already fallen below the US current account deficit. If sustained, a repeat of the 1992- 95 period could not be discounted, when the US dollar fell continuously against the yen and many Asian currencies.’

Other negatives which could add to the selling pressure on the US currency in 2008 include persistently high oil prices, a worsening in the current US credit crunch and a sharper fall in US house prices – all of which could combine to force the US economy into a recession.

In yield terms, these could in turn drive short-term US interest rates to lows of between 2.5 and 3.5 per cent, compared to 4.25 per cent currently.

UOB researchers say a combination of domestic Asian inflationary pressures and more aggressive Fed cuts would translate into more upside pressure on Asian currencies in 2008, because Asian central banks now appear more willing to let their currencies appreciate to counter higher price pressures.

And in a disorderly worst-case scenario, warned UK-based research firm IDEAglobal, the greenback’s losses could even deepen towards 90 yen and US$1.70 per euro.

‘Fed rate cuts to around 2 per cent would have to be accompanied by a significant loosening of US fiscal policy.

Financial asset deterioration in the US would be deeper, US dollar pegs would be broken and the carry trade could take a big multi-quarter hit,’ they say.

And even if not acknowledged publicly, it has been suggested by some that rapidly growing external imbalances have also made Asia and the US more accepting of further downside adjustment for the US currency – especially if this happens in an orderly fashion rather than as a panic sell-off.

US investment bank Merrill Lynch explains that in Asia, such a change in attitude will take hold as more technocratic regimes come to the fore in places like China, South Korea, Taiwan and Thailand over the course of 2008.

As for the US, DBS researchers say: ‘Despite the US Treasury’s attempts to reassure its G-7 partners that it still has a ‘strong dollar’ policy, we believe that in reality, US policymakers do not mind a weaker US dollar.

‘Increasingly, they have been pointing to the economic cushion provided by the export sector in their bid to keep up confidence in the US economy.’

By the second half of 2008, however, there’s a chance that the US currency might manage some kind of recovery as US growth prospects improve with continued Fed interest rate cuts – especially against now-overvalued currencies like the euro, Australian dollar and New Zealand dollar, all of which registered far stronger gains than their Asian counterparts in 2007.

In terms of the Australian and New Zealand currencies, Merrill Lynch warns: ‘By H2 2008, business cycle concerns and pressure on commodity prices should begin forcing both currencies back towards long-term valuations. The New Zealand dollar is expected to under-perform, and there are already signs that RBNZ hikes and New Zealand dollar strength are placing downward pressure on housing prices and activity.’

A simple average of the forecasts from five research firms polled by BT suggests that the New Zealand dollar could finish 2008 as much as 8 per cent weaker in US dollar terms, even as the latter chalks up a sharper 7.4 per cent loss versus the Chinese yuan.

 

Source: Busines Times 2 Jan 08

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