Thursday, April 19, 2007

Flight from U.S. dollar gathers strength

Europe new magnet for higher investor returns
Jacqueline Thorpe
Financial Post, with files from Reuters
Foreign currency traders have been downgrading the U.S. dollar, as the belief is the outlook for corporate profits is higher in the eurozone.
CREDIT: Kieran Doherty, Reuters
Foreign currency traders have been downgrading the U.S. dollar, as the belief is the outlook for corporate profits is higher in the eurozone.

The assault against the U.S. dollar intensifed yesterday as the greenback slumped to historic lows against currencies as diverse as the U.K. pound and the Polish zloty amid growing conviction among investors higher returns lie beyond U.S. borders.

While many analysts say the greenback will continue to fall against many currencies, a question mark remains over what it will do against the Canadian dollar. The loonie joined in the greenback assault yesterday, rising US0.19? to a five-month high of US88.66?.

"An IMF forecast that was released last week showed for the first time in 37 years you will get 5% global growth and the U.S. accounting for less than 10% of that growth -- half its normal share of global GDP," said Stefane Marion, assistant chief economist at National Bank in Montreal. "You've never seen the global economy growing at 5% with the U.S. growing ... only 2.2%."

The catalyst for this week's dramatic move was figures that raised chances for higher interest rates outside the United States, while cutting them at home.

Britain reported inflation soared to 3.1%, forcing Mervyn King, governor of the Bank of England, to write an explanatory letter to the U.K. Treasury and propelling the pound to US$2.0133 yesterday, its highest since 1992. In contrast, U.S. core inflation was weaker than expected.

The euro, meanwhile, shot up to US$1.3660, its strongest in two years, bringing it within 60 ticks of its December, 2004, record.

Europe is becoming an increasing attraction for investors.

"Within the last few weeks European equities have reached a greater market cap, when you include Russia in the equation, than the U.S." said Shaun Osborne, chief currency strategist at TD Securities in Toronto. "Certainly European bond markets are deep and liquid and offer a viable alternative to the U.S."

"Another factor might be this issue of [U.S.] protectionism that has come up," Mr. Osborne said.

A Merrill Lynch survey of global money managers released yesterday showed a net 38% believed the outlook for corporate profits was most favourable in the eurozone, while a net 42% believed the outlook to be the worst in the United States.

"This divergence between the two regions is the biggest since April, 2001," Merrill said. "What is more, investors see the eurozone as being the most undervalued equity market, and the U.S. as the most overvalued. So far this year, eurozone equities have outperformed the U.S. market by more than 6% on a common-currency basis."

The greenback not only wilted against the euro yesterday. It reached its lowest level against the zloty since November, 1996, and it fell to near two-year lows against the Hungarian forint and hit a 17-year low against the Australian dollar and a 22-year low against the New Zealand Kiwi.

While the United States has been worrying about a submerging housing market and slowing business spending, emerging Europe has been revelling in strong data and growing integration with Germany, France and Britain. Commodity currencies, like Australia, New Zealand and Canada, have been flying high on soaring prices for gold, and metals and renewed vigour in the oil price.

Underlying the weakness in the U.S. dollar has been its persistent current account deficit, which reached US$783-billion, or 5.8% of GDP last year. Foreign exchange markets are wary of current account deficits because it means having to borrow from abroad to fund the extra consumption.

"Our overall view is pretty much bearish the dollar structurally," said Steven Englander, head of G10 foreign exchange strategy for Merrill Lynch in New York. "We don't think U.S. assets are going to be attractive enough to get the kind of overfunding they need to have as large current account deficit that they have, plus to get the dollar to appreciate."

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