Special Report Updates:
Dollar to fall as investors shun U.S.
Source: Chris Gothard, Bloomberg, September 28, 2001.
London-Citibank, the biggest trader in the $1.1 trillion-a-day foreign exchange market, expects the dollar to fall against the euro and the yen by the end of the year as foreign investors cut back on purchases of U.S. assets.
Steven Saywell at Citibank is among 56 analysts, investors and traders in a Bloomberg News survey who forecast the dollar will weaken, falling to 94 U.S. cents per euro based on the average projection. The currency will extend its third-quarter drop of 6.7 percent against the euro on concern the U.S. economy will fall into recession following terrorist attacks on Sept. 11, analysts said.
"U.S. investments are less attractive to foreigners now," said Saywell, a currency strategist at the Citigroup Inc. unit, which ranked No.1 in Euromoney magazine's May 2001 poll of market share. "There is a threat to corporate earnings."
The U.S. economy grew at a 0.3 annual rate in the second quarter, the slowest pace since 1993. Foreign investors bought $299 billion more of U.S. assets than they sold in the first half of this year, according to Treasury Department figures.
The average forecast showed the dollar falling to 95 cents per euro by the end of March 2002 from its current level of 90.99.
"The third and fourth quarters will show contraction in the U.S.," said Adrian Cunningham, who helps oversee about $150 million at Abbey National's Talorcan hedge fund in Glasgow. "That will slow down the flows into U.S. assets, weakening the dollar." Cunningham's fund favors euros over other currencies.
Consumer Confidence
U.S. consumer confidence in September plunged to the lowest level in more than 5 ½ years, while jobless claims surged to the highest levels in nine years last week. A decline in confidence following the terrorist attacks on New York and Washington and in expectation of a U.S. military response may prompt consumers to slow spending, which makes up two-thirds of the economy.
"The costs associated with any kind of war aren't going to be good for the U.S. economy," said Cunningham, who sees the dollar slipping to 95 cents per euro by year-end and 98 by the end of March next year.
The most pessimistic forecast for the dollar against the euro came from J.P. Morgan Chase & Co., which sees the U.S. currency weakening to 1 dollar per euro by the end of this year.
As the U.S. falls into recession "corporate earnings news will disappoint investors, drying up flows" into U.S. assets, said John Kyriakopoulos, a currency strategist at J.P. Morgan. "That will drive the dollar lower."
Still, predictions of a stronger euro against the U.S. currency are nothing new, and some banks see the euro slumping. Prebon Yamane's 89 cents was the most bearish prediction for the euro for year-end, while the most pessimistic euro forecast for end of first quarter was MSI Global's 86.
Yen Seen Little Changed
Against the yen, the U.S. currency is likely to end the year at 120.09, little changed from its current level of 119.54, and finish the first quarter of next year lower at 122.69, the survey showed. The dollar slipped almost 5 percent against the yen in the third quarter.
Citibank analysts were the most bearish survey participants on the dollar against the yen, forecasting it will fall to 112 yen per dollar. They also recommend their clients sell dollars for yen.
"Japanese investors will curb capital investment into the U.S. to avoid risk," said Citibank's Saywell.
Citibank sees the U.S. suffering two quarters of contracting gross domestic product, the definition of a recession used by many analysts.
Still, Japan has sold its currency on seven days in the past two weeks against both the dollar and the euro in an effort to support exporters' earnings and foster growth.
"Japan's only hope to boost economic growth is to weaken the yen," said Hans Redeker, chief currency strategist at BNP Paribas. He sees the yen weakening to 125 yen per dollar by year- end. "The Bank of Japan realizes this-I wouldn't be surprised if we see further intervention."
Weaker Yen Sought
Japanese policy makers have few options besides weakening the currency to try to steer the second-biggest economy away from recession. Interest rates are already near zero, and government spending is constrained by debt amounting to about 130 percent of gross domestic product.
Japan's economy shrank 0.8 percent in the second quarter and analysts surveyed by Bloomberg News predict another contraction this quarter, which would put the economy in recession.
Earnings of Japanese exporters generate 10 percent of the nation's economic output. Finance Minister Masajuro Shiokawa has said he wants the yen weaker than 117 per dollar.
The yen is one of several major currencies that have benefited against the dollar following the terrorist attacks. Since Sept. 11, the U.S. currency has fallen 1 percent against sterling, 1.4 percent against the euro, 1.4 percent against the yen, and 4.7 percent against the Swiss franc.
The average of analysts' forecasts in the survey see the Swiss franc continuing to benefit against the dollar, rising to 1.58 Swiss francs per dollar by year-end.
"It is safe-haven flows on the prospect of war which is boosting the Swiss franc,' said Kyriakopoulos at J.P. Morgan.
The pound will also gain against the U.S currency in the next three months, rising to $1.48, the survey showed.
If the currencies fulfill the average of the forecasts in the survey it will mean the dollar would be little changed against the euro in 2001 from its close of 93.95 cents per euro in 2000. Against the yen, it will have climbed 4.4 percent from the 2000 close of 114.58 yen per dollar.
Investors dumping U.S. dollars
Source: Hans Greimel, AP Business Writer September 28, 2001.
Tokyo-It has long been a rule of thumb in the financial world: In times of trouble, buy dollars.
Not this time.
Investors pondering the effect of the terrorist attacks on the United States' wobbly economy and jittery over talk of war are dumping the dollar, and seeking a safe haven elsewhere.
For much of the year, the dollar soared against the world's currencies as people rushed to invest in the United States, betting it would be the first to recover from the global economic slowdown.
That changed when terrorists hijacked airliners on Sept. 11 and slammed them into New York's World Trade Center and the Pentagon in Washington.
"When we get a shock to the system like this, a safe haven is going to be different to everybody," said James Malcolm, an economist with JP Morgan in Tokyo. "People cut back on risky positions and keep their money at home.'"
Many economists believe the attacks pushed the battered U.S. economy into recession, and Treasury Secretary Paul O'Neill has admitted the shock could delay a U.S. economic recovery by as long as six months. Meanwhile, the U.S. stock markets, closed for four days following the attacks, fell by double-digit percentages upon reopening last week.
Suddenly, the United States doesn't look like the investment it was - and the dollar shows it.
In the two weeks since the attacks, the dollar tumbled as much as 5 percent against both the Japanese yen and the euro before stabilizing somewhat in recent days.
The dollar's weakness against the yen could have been worse if the Bank of Japan hadn't intervened seven times to buy dollars in an effort to keep it from falling farther.
In late London trading, in fact, the yen rose to 119.65 yen versus 117.87 yen Wednesday after the Japanese central bank waded into currency markets yet again in New York, buying dollars through its account at the U.S. Federal Reserve. Before the attacks, the yen had been as high as 122 against dollar.
Meanwhile, the euro was trading at 92.05 cents against the dollar, down slightly from 92.09 cents in London on Wednesday. Before the attacks, the euro was below 90 cents.
Analysts say the sell-off is a normal reaction to growing risk in a tattered global economy.
Investors worry that overseas investments, even in the United States, could be frozen, lost or otherwise hard to access if bombs start falling. And the threat of a war in Afghanistan spilling over into the Middle East and disrupting oil supplies makes matters worse.
"Until the military response plays out, there will continue to be uncertainty because the U.S. is at the epicenter," said Paul Sheard, an economist with Lehman Brothers in Tokyo.
Dim Outlook for Japan
Signaling just how far confidence has eroded, the dollar's fall defies an increasingly dim outlook for the Japanese economy. Economic growth in Japan has stagnated, unemployment is peaking at all-time highs and reform plans are only slowing gaining momentum.
Many investors feel Japan has already bottomed out, and that the United States will fall more. That gloomy U.S. forecast was underlined Tuesday, when U.S. consumer confidence plunged to its lowest level in six years.
The export-dependent economies of Japan and Europe rely on weak domestic currencies to make their goods cheaper, and more competitive, overseas. That common interest led central banks in both regions to join forces Monday in a money market intervention that temporarily halted the dollar's fall.
But economists warn the dollar has been only holding its own in recent days because the overhanging threat of more interventions has spooked traders from overselling the currency. They add that it may be a long time before the dollar stabilizes, let alone makes a comeback.
Activity on currency markets has trailed off to a fraction of its normal volume as people wait to see how a U.S. retaliation takes shape, they note. And the massive costs of the expected armed conflict could deal the U.S. economy another blow - at least in the short term.
Don't Forget the Dollar!