Posted on 12/12/2004 3:17:49 PM PST by Pikamax
2005: Year of the weak dollar
2 hours, 1 minute ago Top Stories - AFP
WASHINGTON (AFP) - The Americans may be playing a dangerous game in letting the dollar slide, some analysts say, and 2005 could be the year of reckoning.
AFP/File Photo
Since a recent peak in May 2004, the dollar has plummeted 12 percent against the euro, and the trend is unlikely to change.
"The dollar slide that began in 2002 is likely to continue, especially if, as we expect, the US current account deficit (the broadest measure of the trade gap) hits a new record and US capital outflows pick up," said Citigroup chief economist Kermit Schoenholtz.
In effect, the deeper the trade deficit, the more the US economy goes into debt. To narrow the shortfall, either the dollar must slide or interest rates on US investments must rise to lure investors.
In 2003, the current account deficit broke above 500 billion dollars for the first time.
In 2004, it is set to reach a new record.
For the US economy, the dollar slide is not all bad. "Made in USA" exports are now comparatively cheaper for foreigners, supporting production in the United States.
US President George W. Bush (news - web sites)'s administration is broadly believed to be deliberately allowing the dollar to go with a policy of benign neglect, repeating a mantra-like support for a "strong dollar policy" while also stressing that the open markets must decide its value.
The strategy has been viewed by the markets as clearance to sell.
But it is a risky game.
"The latest down-leg in the US dollar, a trend expected to continue into the second quarter of next year, is likely to provide some positive offsets, though not as much as in 2003 and 2004," said Merrill Lynch economist Ron Wexler.
US companies in the Standard and Poor's 500 index are likely to boost operating earnings per share by only 4.2 percent next year, Wexler forecast, compared with an estimated gain of 21.6 percent in 2004.
Other countries, the US trading partners, will be increasingly punished next year by the weak dollar, which crimps their exports, slows economic activity and reduces their capacity to buy from the United States.
If foreigners grow weary of the situation, the possibility of a flight out of dollars cannot be excluded, said Morgan Stanley chief economist Stephen Roach, a renowned bear.
"Nor can I dismiss the possibility that the world flinches, with Japanese and European authorities intervening in foreign exchange markets," Roach said.
"Depending on the degree of intervention, it is possible that the dollar's depreciation could be aborted or even go the other way. Should that occur, current-account adjustments will come to a standstill -- thereby perpetuating America's persistently large trade deficit and stoking protectionist sentiment in the US."
Equally worrying would be a unilateral Asian intervention. "In that case, Europe would continue to bear the brunt of a falling dollar, heightening the possibility of trade frictions between Europe and Asia," he said.
Furthermore, the dollar's decline raises pressure on the Federal Reserve (news - web sites) to increase interest rates, lifting the cost of credit and risking an economic slowdown.
The big worry for 2005 in a climate of rising rates could be the booming housing sector. A few analysts say the sector may be in a bubble, though most -- notably Federal Reserve chairman Alan Greenspan (news - web sites) -- disagree.
"The nation's economic growth in 2005 will be more moderate than in 2004," predicted the Federal Reserve Bank of Chicago, which envisions gross domestic product (GDP (news - web sites)) growth slowing to 3.3 percent next year from a likely 4.4 percent in 2004.
But some analysts see a brighter horizon.
"Several factors support the view that the recovery will sustain a cruising speed of four percent or better in 2005," Citigroup chief North American economist Robert DiClement said, citing rising productivity, a still-accomodative interest-rate policy and a gain in net jobs, which should boost household incomes.
Wachovia Economics Group analysts, however, cited "one economic and two political risks" ahead.
The possiblity of rising inflation was the economic risk.
A re-evaluation of China's yuan-dollar link was a political concern, they said in a report.
The other political risk was the reform of Social Security (news - web sites), which is vastly underfunded in relation to the entitlements promised to retirees.
"Failure to address the issues of entitlement reform could prove catastrophic for the long-term viability of the US economy," Wachovia economists warned.
I'm pleased as punch that I loaded up on euro-denominated assets in '02/'03. A lot of my market predictions didn't work out, but that one sure did! I'm thinking it's about time to start reeling back in though soon .. within the next six months.
Let the dollar week.. it helps our trade exports.. Euro is already crying there products are too expensive.. Fawk um..
Because the media can't whine about unemployment numbers, they've moved on to the next red herring. Yawn.
Last year this group outperformed all other groupings. With little more than a simple investment in the "S Fund" a government employee saw a 51%+ earning through March 2004. If he "went cash" from then to August 2004 and then dropped back into the "S Fund", he would have seen another 20% earning.
And that's just what a government employee could do without much effort. So, what could astute analysts do who had time to look more deeply into the economy. Well, for one, they could have looked to the future and focused on the Russell 2000 index. That one is based on the top 2000 of the aforementioned 5000 firms.
Right now any index fund based on the Russell 2000 index is doing great. There's been a 12% increase over the last month.
There's more to come, too, as interest rates go higher and the 2000 biggest of the smaller firms begin to gobble up their competitors further down the line rather than borrow money to expand.
Profits should go through the roof here.
Best of all, the price of competing products and services in Europe is TWICE as great as what they are asking, which means they should be able to pick up all kinds of new, and highly profitable business in Europe and East Asia.
I figure the Russell 2000 index is going to more than double over the next year.
What were the Europeans doing in 98?
Weren't they doing all the stuff that put the Euro on a 5 year slide?
that argument sounds like killing yourself to hurt your family. it certainly works, but the costs are pretty high.
The Yuan will be re-pegged by the end of January. not as good as a float, but its something at least. and it will be the first in a series of successive re-pegs. we need a 40% correction at least.
I have had for about 7 years just 10 or so percent in a Eur fund but just moved it all to an emerging europe/mediter fund. What do you think? More?
I think a screen for companies that have substantial dollar denominated debt and a high % of euro sales would be a rewarding endeavor.
And that is good? I think not.
Let's see we got the collapsing economy, global warming, and oh yeah--
THE SUN IS GOING TO EXPLODE!!!
in 5 billion years...
And it's all Bush's fault!
Well, first, lemme say that I've made some pretty spectacular misjudgments too. I was far too pessimistic on the American stock market until about a year ago, thinking that the recovery would stall out and US stocks tumble last winter.
That being said, I'm extremely pleased about my two emerging market funds and that's an investment I plan to stick with. I'm very optimistic about the economic prospects for the emerging eur/med region in particular. It depends on your tolerance for risk, but combined I'm a bit higher than that myself (16%).
Second, We are the largest economy growing at the best rate in the world, China's GDP is still smaller than just NY State. Europe is no growth (except for the UK), so in those circumstances the dollar merits its current value and then some.
Third, gold and oil both declined as it became clear that Iraq is settling down and the President (rumored) is going to insist on a bare bones budget.
Fourth, in respect to the dollar value some of the Austrian School economists believe that balance of payments is not the crucial variable but, rather, increasing the money supply. This is one thing Greenspan, Snow et al can control and IMHO they will.
All told, one through four augur for a steady or increasing USDX.
2005: A Big Year For Outsourcing
http://www.freerepublic.com/focus/news/1299961/posts
Unfortunately, they are not paying enough attention to the yuan.
yitbos
It's untrue that the UK is the only European nation with economic growth. Ireland has had the strongest recent growth in Europe, even stronger than China. Of the old EU 15 the UK is also surpassed by Finland, Portugal, and Greece; it's edged by Spain.
As for the 8 new eastern members, the UK is surpassed by all except the Czech Republic, with which it's tied.
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