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Dollar rebound temporary { August 24 2003 } Original Source Link: (May no longer be active)
http://www.nytimes.com/2003/08/24/business/yourmoney/24PORT.htmlhttp://www.nytimes.com/2003/08/24/business/yourmoney/24PORT.html
August 24, 2003
PORTFOLIOS, ETC.
A Rebound for the Dollar, but Maybe Not for Long
By JONATHAN FUERBRINGER
THE dollar has bounced back against the euro. It has climbed 9 percent since May 29, when it fell to its weakest level since the euro's introduction in 1999.
The dollar's gain comes as new data shows America's economy rebounding, while Europe's is still weak. The sharp increase in interest rates and the stock market's resurgence have also made investments here more attractive to foreigners.
But American investors in Europe, whose second-quarter returns were buoyed by six percentage points when stronger euros were translated back into weaker dollars, should not despair.
Yes, third-quarter returns will be reduced by about six percentage points if the euro remains near its current level of $1.09, down from $1.15 at the end of the second quarter. But so far this year, the euro is still up nearly 4 percent against the dollar. That, coupled with a gain of 8.7 percent in Morgan Stanley Capital International's euro stock index through Friday, has given American investors a gain of 12.5 percent.
And analysts predict that the dollar's rebound will not last. Forecasts for the next 12 months have the euro rising in value to between $1.15 and $1.40.
"We have not changed our view that the euro will rally," said Kenneth Landon, senior currency strategist at Deutsche Bank, who is forecasting that the euro, over the next 6 to 12 months, will reach $1.20, just above its May high of $1.19.
That is a lot more of a currency bounce than American investors are getting in Asia, especially in Japan. The MSCI Japanese stock index is up 16 percent this year in yen terms and is up only a little more, 17 percent, in dollar terms because the dollar has barely slipped against the yen this year.
Japan has prevented a decline in the dollar like the one against the euro by intervening in the foreign exchange market. The Bank of Japan has sold trillions of yen to buy dollars because the government wants to keep the yen as weak as possible against the dollar. A weaker yen makes exports more competitive in the American market, helping the troubled Japanese economy.
Japan is also worried that its products will lose market share to the Chinese if the yen were much stronger against the dollar than the Chinese yuan.
Economists' main reason for the euro's rebound is the rise of America's current account deficit, which includes profits on investments as well as trade in goods and services with the rest of the world. Through the first quarter this year, the 12-month deficit was a record $510 billion — and it is growing.
That deficit must be offset by money from abroad. If those foreign inflows slow or the deficit keeps growing, the dollar will weaken, and interest rates will have to rise to attract more foreign money.
The main question is this: How much will the current account deficit affect the dollar?
David Gilmore, a partner at Foreign Exchange Analytics, says the growth comparison between the United States and Europe favors the dollar now, because Germany, Italy and France are in decline. But as the American economy grows, the current account deficit may widen, increasing the need for foreign investment. But there is a risk that the inflow will not be robust enough. So, he says, "It may not take much to get the markets focused back on the current account deficit." He predicts that the euro will rise as high as $1.40 in the next year.
ROBERT SINCHE, global head of currency strategy at Citigroup, is less worried. He agrees that the current account deficit is a drag on the dollar. But signs show that the flows from abroad are strengthening, he contends. He points to an important increase in the buying of corporate bonds and stocks over the last year.
According to Treasury data though June, the 12-month net foreign purchases of American stocks and bonds totaled $697 billion, up from $585 billion for the 12 months ended in March, when the current account deficit topped $500 billion.
"That matters," he says, predicting that the dollar will fall and the euro will rebound, but probably only to $1.15.
Copyright 2003 The New York Times Company
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