Anyone who says the dollar is weak after it fetched a record-low $1.3681 (Rs55.68) against the euro and the fewest pence against the pound in 25 years is expressing a euphemism.
The currency may decline at least another 10% by the end of 2008, say Jay Bryson, an economist at Wachovia Corp., and Kenneth Rogoff, the former chief economist at the International Monetary Fund. The dollar has only fallen 3.4% in the past two years to a 10-year low, according to a Federal Reserve index that weighs trade with 38 countries including China, Mexico, Canada and countries in Europe. It tumbled 30% in the three years ended 1988.
“Dollar weakness will be broad-based and could last for years,’’ said Bryson, a global economist at Charlotte, North Carolina-based Wachovia who previously analyzed currencies at the Federal Reserve.
Investors are dumping dollars, lured by higher returns elsewhere. The U.S. will grow more slowly than Europe for the first time since 2001 and Japan for the first time in 16 years, the IMF forecasts. The difference in yield between 10-year German bonds and Treasuries has shrunk to the smallest since 2004.
The Fed’s U.S. Trade Weighted Real Broad Dollar index, a monthly inflation-adjusted gauge of the dollar, has fallen 16% since 2002 to 94.27, near the lowest in 10 years. Bryson said it may drop 15% by the end of 2008, spurred by a drop of more than 9% against China’s yuan. Rogoff expects a 10% decline.
The U.S. will expand 2.2% this year, compared with 2.3% in the euro region and Japan, according to the IMF. The U.S. grew 3.3% in 2006. Growth slowed to an annualized 1.3% last quarter, the slowest in four years. The global economy is growing at its fastest in a quarter century.
“We are in a situation where Europe and Japan are going to outperform for a couple of years,’’ said Rogoff, an economics professor at Harvard University in Cambridge, Massachusetts. “There’s a depreciation bias in the dollar.’’
Central banks and investors are helping spur the dollar’s drop. U.S. investors bought 43% more foreign stocks and bonds last year than in 2005, Treasury Department data show.
The yield advantage Treasuries have enjoyed over European debt is narrowing. The 4 5/8% U.S. Treasury note maturing in February 2017 yields 4.64%, about 0.45 percentage point more than the 3 3/4% German bund due in January 2017, close to the smallest gap since November 2004.
‘Europe Gets Nervous’
Central banks are paring holdings of U.S. assets. The dollar accounted for 64.7% of global currency reserves in the fourth quarter, down from 65.8% in the prior three months, IMF data show. The euro’s share was 25.8%, the highest since the currency’s 1999 debut. It will rise to 40% by 2010, Frankfurt-based Deutsche Bank AG, Germany’s biggest bank, forecasts.
The dollar’s depreciation has boosted overseas sales at U.S. exporters including St. Paul, Minnesota-based 3M Co., the maker of Post-it Notes, while hurting non-U.S. companies. 3M said currency fluctuations boosted sales 2.5% last quarter. Clermont-Ferrand, France-based Michelin & Cie., the world’s second-largest tiremaker, said the swings caused a 3.6% decline.
“When the euro gains, people in Europe get nervous that it’s going to hurt employment,’’ said Robert Mundell, an economics professor at Columbia University in New York and winner of the 1999 Nobel Prize in economics. “I don’t see the euro in the $1.40s for long.’’
The dollar fell 2.88% against the euro and 1.68% compared with the pound this year. The euro is worth $1.3596 and the pound buys $1.9927. The dollar touched $2.0133 per pound last month, the weakest since June 1981.
Many analysts forecast the dollar will rebound next year along with the U.S. economy. The dollar will strengthen to $1.30 by the end of 2008, according to the median forecast of 47 analysts surveyed by Bloomberg News through 4 May. The U.S. economy will accelerate to a 3% growth rate in the first half of 2008, according to the median forecast in a Bloomberg survey on 10 April.
The decline in the dollar has helped trim the U.S. trade deficit. The shortfall in the current account, the broadest measure of trade, has shrunk to $195.8 billion in the fourth quarter, equivalent to about 6% of the economy, from a record 7% in 2005.
The deficit is about double the percentage of the gross domestic product that it was in 1985, when the Fed’s Real Broad Dollar index began a three-year, 30% slide that helped push the U.S. current account into surplus in 1991.
“The main trend is averse to the dollar, not only for psychological reasons but it’s because the U.S. is a high- consuming society,’’ said Paul Samuelson, a professor of economics at the Massachusetts Institute of Technology in Cambridge, Massachusetts, who won the Nobel Prize in economics in 1970.
Asian central banks may also begin to let their currencies appreciate at a faster pace. Dollar purchases by Asian central banks have caused the region’s currency reserves to swell seven- fold in the past decade to $3.37 trillion.
The Indian rupee’s 5.5% gain in the past month has prompted speculation the Reserve Bank of India stopped buying dollars after a record $11.9 billion of purchases in February.
“These countries continue to ratchet up foreign exchange reserves at record rates and one may begin to question the sustainability of that,’’ said Lawrence Goodman, head of emerging-market currency strategy at Bank of America Corp. in New York.