US dollar 'will keep falling'

Heather Stewart
Sunday November 26, 2006
The Observer


The US dollar has reached a 'tipping point' as foreign exchange markets wake up to the threat that the Federal Reserve will have to slash interest rates in the new year to stave off recession, analysts say. After a sharp sell-off on Friday took the greenback to 18-month lows against the euro, and pushed the pound to $1.93, economists warned that there was worse to come for the US currency.

'We are just at the start of what we think will be a downtrend for the dollar - a tipping-point has probably been reached,' said Tim Fox, currency strategist at Dresdner Kleinwort Wasserstein, who expects sterling to hit $2 within the next three months.

The euro has been the main beneficiary. The European Central Bank is expected to continue raising interest rates into next year amid strong growth in the eurozone economies, while the Fed has left rates unchanged at 5.25 per cent since June.

'Steadily, the US dollar will decline through 2007, but probably at a faster pace in the second half of the year, as people realise the Fed is going to have to cut rates,' said Paul Mackel, currency strategist at HSBC.

Senators on Capitol Hill would like to see China allow its currency, the renminbi, to appreciate further against the dollar, making Chinese imports more expensive; but the chances are low.

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