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Dollar deja vu. (US dollar) (Cover Story) Futures (Cedar Falls, IA) April 1, 1995 | Nusbaum, David
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A year has come and gone and here's the U.S. dollar once again hovering near historic lows
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versus the yen and D-mark. Can the greenback shake off the Mexico bailout and finally break out of its extended funk? Y ou might think U.S. Federal Reserve Chairman Alan Greenspan's late February remarks, hinting the U.S. economy may soon reach its Shangri-la, a soft landing, would eventually rouse the dollar from its hibernation near historic lows (it ended February near [yen]97 and DM1.46). Still, with major doubts about the Mexican peso crisis and trade deficits lingering, the greenback may just hit the snooze button in 1995. The U.S. economy will slow to 3% growth this year, but there's still some unfinished growth and inflation - and perhaps two more Fed Fund hikes - in the pipeline for the second half, says David Jones, chief economist with Aubrey G. Lanston & Co. Inc. in New Y ork. "I was one of those dollar bulls," Jones says. "I was strongly dissuaded." The reasons: the U.S.'s current account deficit, further peso troubles and the fact the Deutsche mark has become, for now, the safe haven currency. "There are too many dollars out there," Jones says. "Japanese firms will pound the market on any dollar strength. I used to think such talk [the dollar hitting [yen]90] absurd. Now I've changed." The dollar should be particularly vulnerable versus the D-mark, he adds.
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For Ezra Zask, president of Ezra Zask and Associates in Norfolk, Conn., 1995 is just a rerun of last year's dollar weakness. Only two events - a substantial improvement in U.S. trade flows or a substantial reversal of investment flows - could make for a dollar turnaround, he says. But investment flow improvement, for example, depends on the dollar itself stabilizing and U.S. interest rates.
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"Even though [U.S. rates] are attractive, they aren't that attractive to investors compared to Europe," says Zask. He adds that, secondarily, the Mexico effect will continue dampening the dollar in 1995 as more bad news surfaces. On a different note...
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Other analysts choose to accentuate the dollar's positives. While he expects the dollar to test historic lows in the near term, Earl Johnson, foreign exchange economist for Harris Trust & Savings Bank in Chicago, sees an eventual rebound for the dollar, weighed down of late by political uncertainty in Europe, the peso crisis and speculation over whether U.S. interest rates www.highbeam.com/doc/1G1-16999648.html
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Dollar deja vu. (US dollar) (Cover Story) - Futures (Cedar Falls, IA) | HighBeam Research
have peaked. The D-mark outperforming the dollar in early 1995 told him the peso situation remains more serious than originally thought. Still, the dollar should have done better. "Eurodollars are 1% over Euromarks, but investors are saying 'We don't care,'" he says. Y et capital flows are the key, and while the D-mark has been the safe haven of late, Johnson says with an economic soft landing in sight, U.S. stock and bond market rallies should attract domestic and international investors to U.S. markets. If the peso stabilizes, Johnson sees the dollar reaching DM1.58 and [yen]103 by June. The peso's drag on the dollar is close to running its course, agrees Pat Magill, chief corporate dealer for Daiwa (Europe) Bank Ltd. in London. Even with the market dismissing the effects of German metal workers strikes, Magill sees the dollar rebounding to DM1.48 around May, DM1.51 to DM1.52 by the third quarter. David Abramson, managing editor of Bank Credit Analyst's ForexCast in Montreal, says the dollar could rebound to DM1.60 to DM1.70 by summer based on two factors. While inflation-suggesting economic data should encourage U.S. inflation hawks, the Bundesbank may even cut rates as the D-mark's current strength both limits German import price inflation and makes German exports less competitive. From midyear on, however, Abramson expects the dollar to weaken in D-mark terms. Meanwhile, Zask expects the Japanese yen to remain strong in 1995. "[Japanese investors] look like they are in a strong repatriation mode," he says. "Den before the [Kobe] earthquake they
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Speaking of portfolio flows, Gerard Lyons, chief economist at DKB International in London,
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expects risk-averse Japanese investors to avoid the dollar until U.S. inflation worries abate (they might by the second quarter, as will the U.S./Japan trade deficit). With U.S. investors already starting to keep more money at home following the Mexico, Orange County and Barings crises. Lyons says the dollar could stabilize and rebound to [yen]98 to [yen]100 by midyear, 103 by year end. Abramson expects more near-term dollar weakness, given the United States' large structural current account deficit and need for foreign capital. Unlike during the last round of Fed rate hikes in 1989-90, the dollar hasn't mustered a rebound versus the yen. Why, Abramson asks? Because real interest rates are only slightly above German assets, and because the dollar also benefitted from major trade balance improvements six years ago - not so in 1994. "This is a shakeout," Abramson says, and will continue until something else happens, such as Japan easing interest rates to bolster a weak stock market. The Fed likely will tighten, too, on inflationary data in coming months, producing "a moderately firmer dollar from wherever we are in April," Abramson says. Magill fails to see the attractiveness of low Japanese yields and figures the dollar is close to bottoming versus the yen. An improving trade deficit picture could also help the dollar reach [yen]100 by May, [yen]105 to [yen]106 by the third quarter, he says. Paul Horne, international economist for Smith Barney Inc. in Paris, says the yen could weaken to 103 versus the dollar this year. Longer-term, however, Home says the yen will rise throughout the mid-1990s on the back of a mild economic recovery and significant productivity gains that will generate more capital inflow. As for the rest of the major currencies, cross-trades going long the D-mark versus other European currencies continue to be popular. Zask expects a strong D-mark and Bundesbank rate hikes in the second half that could produce an effect similar to the U.S. Fed's in 1994, www.highbeam.com/doc/1G1-16999648.html
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Dollar deja vu. (US dollar) (Cover Story) - Futures (Cedar Falls, IA) | HighBeam Research
rippling through the rest of Europe. Europe sans D-mark But remove the D-mark from the equation and look out for Europe - it's incredibly oversold, adds Zask. The Italian lira is due for a 10% to 20% reversal eventually, but "I wouldn't go bottom-picking," Zask says. He also wouldn't buy lira against the D-mark, but versus other European currencies like the Belgian franc. Johnson, too, sees most European crosses, like the lira, at record lows and assumes they'll have to peak soon. "But who knows when?" he says. "The Netherlands is one of the only European countries that doesn't have a scandal." Abramson sees potential weakness for the French franc. The troubled currency has attempted to keep pace with the D-mark, but faces two risks. The Bank of France may not dare match any Bundesbank rate hikes with French unemployment, over 12%, near record highs. The French economy also may slow down post-election, as the new government tightens fiscal policy to combat high deficits. In all, Abramson says it could take FF3.60 to FF3.65 to buy one D-mark by midyear or third quarter. The British pound has plenty of reasons to remain weak, Lyons says. There's politics (the fear that the current government could be replaced by the Labour party or could ease rates to improve its chances), lack of faith in U.K. assets post-Barings, and fear that circumstances may tie the Bank of England's hands on interest rates. As a result, Lyons sees the pound mired in a DM2.30 to DM 2.35 range at midyear. There are more exciting global opportunities, however. Following a recent correction in its steady rally begun in late 1992, the New Zealand dollar presents a good opportunity given a strong fundamental and rate outlook, Abramson says. He adds that New Zealand is the world's only country to invert its yield curve; worth U.S.63[cents] in late February, its currency could reach U.S.70[cents] by year end. Zask also likes the strong fundamentals and interest rate environment surrounding New Zealand and the Singapore dollar - "The Swiss franc [i.e. safe haven] of Asia," he says. Last and possibly least, Abramson says the bear market for Canadian dollars is intact, with early 1995 strength merely representing the market working off a temporary oversold condition. The Canadian dollar, worth under 72[cents] in late February, could drop to the mid-60[cents] area by midyear in light of Canada's twin towers - fiscal and external deficits. For example, Canada may have a smaller fiscal imbalance (6% of GDP, including all provinces) than Italy (11%) or Sweden (14%), but those countries have current account surpluses and so are net lenders, while Canada borrows over $20 billion per year. COPYRIGHT 2009 Summit Business Media. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights or concerns about this content should be directed to Customer Service. For permission to reuse this article, contact Copyright Clearance Center.
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