Dollar expected to fall further
In a worst case scenario the bank believes the dollar could fall to $1.40 against the euro if concerns mount over the depreciation of US deficits.
In the bank’s Outlook 2005, economist Niall Dunne was quite emphatic.
“For the past three years Ulster Bank Markets forecast a weaker dollar. And for three years we have been correct,” he said.
“That decline was due to America’s worsening balance of trade and the fiscal deficits.
“Given that those same deficits have now deteriorated to record levels, we see no reason to change our call, and we once again forecast a weaker dollar in 2005,” said Dunne.
Dolmen Butler Briscoe shares the pessimism of Ulster Bank.
“In the short term expect the Euro/USD to push towards 1.40 as the twin deficits continue to haunt the US.
“However, we think by the end of the year the dollar will strengthen as the market responds to better economic data and higher US interest rates.
“Sterling may struggle during the first half of the year as the Bank of England leaves rates on hold, consumer spending disappoints and the housing market weakens.”
In the short term, analysts point out however that US Federal Reserve chairman, Alan Greenspan, has been talking down the dollar.
Some analysts argue that the deficits are reaching the point where they will result in a run on the dollar.
Mr Greenspan and his colleagues believe a run down of the dollar is the best way to achieve that aim, because dearer foreign goods will dampen domestic demand.
There is a growing fear, however, among some experts that the dollar situation is untenable given the huge deficits.
And the world economy will reach the situation where investors will no longer buy into the dollar for fear of its value being seriously undermined.
As things stand we are looking at sterling being worth $2 in the near future without sentiment worsening that much more.
Overall the fear is that the US’s credibility is being undermined to such a degree that a run on the dollar cannot be ruled out.
