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Tough 2003 dollar { January 1 2003 }

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Markets anticipate difficult year for dollar
By Peronet Despeignes in Washington and Ed Crooks in London
Published: January 1 2003 19:49 | Last Updated: January 1 2003 19:49

Markets will open on Thursday morning holding out the prospect of another difficult year for the dollar, which in 2002 suffered its biggest annual fall in 15 years.

Over the past year the dollar has lost 9.6 per cent of its value against a trade-weighted basket of other currencies.

The US currency continued its decline over the holiday season, and during the New Year’s Eve holiday, the euro briefly touched $1.05 - its highest level against the dollar for more than three years. Renewed fears about the American economy's prospects and the threat of further shocks have soured investors' interest in US assets.

The trade-weighted fall in the dollar last year was the steepest since its 16.9 per cent drop in 1987.

As market expectations of an imminent war with Iraq have grown, the dollar has failed to take advantage of its traditional status as a safe haven for investors, losing out to other traditional bolt-holes such as gold and the Swiss franc.

At a time of global uncertainty, risk aversion appears to be pushing investors towards leaving their money in domestic markets, weakening the capital inflows which have supported the dollar.

The dollar has been falling even though most economic forecasters have predicted that growth in the eurozone this year and for the foreseeable future will be weaker than in the US.

Over the past two weeks, however, the US economic data have seemed to turn sharply negative.

Key readings on consumer confidence, factory orders and preliminary reports on holiday retail sales all came in well below expectations. Economists from Goldman Sachs concluded in a recent survey that the US economy "apparently ended 2002 with little forward momentum."

US economic growth during the fourth quarter of 2002 is widely believed to have been just 1.5 per cent on an annualised basis.

The Commerce Department has reported a surprisingly broad decline in orders, shipments and order backlog of business equipment and other durable goods. The Conference Board, a New York business research group, reported earlier this week that its widely watched measure of US consumer confidence had stumbled back toward a nine-year low.

"The U.S. consumer is plagued by job insecurity," said Sherry Cooper, an economist with BMO Nesbitt Burns in a recent report to clients. She noted that debt levels and interest payments were now historically high measured against income, despite low interest rates.

"The driving force for expansion in 2003, therefore, will be the business sector," she said.

But prospects for a revival of hiring and investment still appear dim. Recent economic reports, along with ongoing reports of corporate cost-cutting, suggest there has been no let-up in the reluctance of US businesses to expand their operations.

The durable-goods report showed orders for non-military capital goods excluding aircraft, a measure of business investment, had in fact sunk for three of the past four months, and the Conference Board in a report earlier last month said that its index of advertised job openings remained stuck near decade lows.

Steady downtrends in new home prices and mortgage activity have added to evidence that the housing market has peaked, and preliminary indications suggest growth holiday retail sales may have been the weakest in 30 years.

Bright sports remain: low interest rates, a strong residential housing market, rapid growth of productivity, and thus persistent growth in incomes - crucial supports to consumer spending over the past year.

As they did at the beginning of 2002, many economists are pinning their hopes on the US economy's proven resilience over the past two years.

Hopes for stronger growth are pinned on the stimulus delivered by the Federal Reserve and the White House, with more in prospect, and on hopes that the Iraq war will be short and successful.

But President Bush did little to lift the gloom on Tuesday, by warning that an attack from Iraq or one of its surrogates "would cripple our economy."

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