[I thought this was a nice summary of the most current reasons the dollar's just on the verge of falling. Maybe manana's finally here.]
COMMENT & ANALYSIS: A dollar short
By Mary Chung, Peronet Despeignes and Christopher Swann
Financial Times; May 31, 2002
Since the dollar began its ascent against other currencies in the mid- 1990s, pundits have been predicting that it would soon fall back to earth. Instead the US currency continued to rally, shrugging aside the bursting of the high-technology bubble, a botched presidential election, the onset of recession and the terrorist attacks of September 11.
Yet now, just as the US is recovering from recession, the dollar looks vulnerable. Yesterday, the greenback fell to a 15-month low against the euro, taking its losses against the European currency to 9 per cent since the start of March. "There is growing confidence among analysts that the era of the invincible dollar is finally drawing to a close," says Michael Lewis, senior currency strategist at Deutsche Bank.
This weakness is partly due to doubts about the strength and staying power of the recovery from last year's recession. The revival appears to have been based more on increased government spending and a shift towards a likely build-up of inventories than a turnaround in corporate investment.
But many economists believe that something more profound is also occurring: that markets are starting to signal long-term concerns about the comparative strength of the US economy. "There's a real, emerging problem with perception," says Greg Valliere, managing director of the Washington policy research arm of Charles Schwab. "Whether the reality is as bad is debatable, but perceptions of the US investment climate have clearly changed."
The Achilles heel of the US dollar has been the bulging current account deficit, which is expected to reach $465bn (ý332bn) this year. This means the US needs to attract $1.3bn in overseas funds every day to prevent the dollar from falling. While overseas investors were clamouring to buy US shares, bonds or companies, this posed no problem. But the dollar's status as the prime destination for the world's savings is coming under threat.
The financial inflows that allowed the dollar to fund its bulging current account deficit appear to be waning. Last year, the average monthly net inflow into the US was $44bn. In the first two months of this year it averaged just $14.6bn. "There are signs that the US primacy as an investment location, offering unbeatable returns, is now under threat," says George Magnus, chief economist at UBS Warburg.
There are signs of fund managers losing faith in US companies. Merrill Lynch's latest quarterly survey of US fund managers found a majority intending to reduce their weighting in US equities. Only 22 per cent believed that the outlook for corporate profits was more favourable in the US than in other regions compared with 42 per cent in February. The S&P 500 has failed to outperform eurozone stocks this year, falling 7 per cent. The Nikkei 225, meanwhile, is up 11.6 per cent.
Investors have a number of concerns about the US economy and corporations. First, there is the issue of standards of corporate governance and accounting. "Investors used to shun Asia because of its crony capitalism. Now, many see this as a problem for the US," says Mr Magnus. National accounts show corporate profits have been declining as a proportion of gross domestic product since 1997, while S&P 500 companies have been reporting earnings growth in excess of GDP growth. This indicates that reported profits have been flattered by favourable accounting.
Second, investors are increasingly aware that productivity gains have not translated into higher profitability. The heavy US investment in information technology that raised productivity growth in the 1990s also heightened competition across the economy, increasing transparency and lowering barriers to entry. Consumers and employees, rather than investors, seem to be enjoying most of the gains of rising productivity. For the first time since the 1960s, real US incomes have risen for both rich and poor.
Third, there are fears that the vigour of the US economy is under threat from shifts in government policy. Brian Wesbury, chief economist of the investment firm Griffin, Kubik, Stephens & Thompson, says that the surge in government spending during the Bush presidency - the biggest since the Vietnam era - is diverting resources from the private sector. In its annual Economic Report, the administration warns that both public and private anti-terrorism efforts could depress economic growth "because more labour and capital will be diverted toward the production of security and away from the production [of other goods and services]". At the same time, investors have also become concerned that US moves to impose steel tariffs and expand agricultural subsidies will stall the drive towards freer trade.
While scepticism is growing about the performance of the US economy, some US investors are rediscovering enthusiasm for overseas investments. Few expect the eurozone to emulate the rapid growth of the US in the 1990s. But there are hopes that the eurozone economy is starting to feel the competitive effects of a single currency. Fund managers believe this should start to increase competition across European borders.
Some analysts believe that a possible shift to the right in forthcoming elections in France and Germany will tip the balance towards more pro- market governments. Heightened competition among governments to attract investment through deregulation, more flexible labour laws and lower corporate taxes could improve the appeal of eurozone investment. In March, international fund managers invested a net €4.2bn (ý2.5bn) in eurozone equities and a net €3.9bn in bonds - the first inflow of portfolio funds since November.
Economists have also been impressed by several Asian economies, most notably South Korea, which is demonstrating an ability to generate domestic growth rather than simply relying on US demand for its exports. Even Japan, an economy in which many had lost hope, is now expected to benefit from a cyclical upswing as global demand for its goods revives. Despite the strong rise in the Nikkei 224 this year, international fund managers are still thought to be relatively underweight in Japanese shares. This suggests further room for a shift in investment allocation towards Asia.
Enthusiasts for the US argue that talk of other economies gaining ground is premature. In particular, they say that the investment slowdown in the US is temporary, and recovery will strengthen along with renewed investment. "The deterioration in investment spending by companies is certainly slowing," says Alan Ruskin, director of research at 4Cast, the economic consultancy. "There are signs that the glut of investment is being worked through."
But even those who believe that the US will remain the dominant force in the global economy concede that the dollar could fall further over the next few months. "It is not that we are expecting the US to come off its perch but it should come a little closer to earth," says Stephen Roach, chief economist at Morgan Stanley.
The ultimate fear is that such a fall in the dollar could become self- reinforcing. The US has grown accustomed to a steady inflow of overseas cash, helping to keep share prices higher, investment more robust, interest rates lower and inflation more subdued than they would otherwise have been. If international investors become convinced that the dollar is on its way down, capital outflows could accelerate, says Rory Robertson, market strategist for the Macquarie Bank of Australia.
"The risk is that the virtuous circle of feedback between the economy, equity markets and the dollar that brought good things to the US in the late 1990s could turn into a vicious circle of feedback in the period ahead."
Additional reporting by Mary Chung in New York