Declining dollar may force ECB rates rise

HIGHER interest rates and a continuing depreciation of the dollar in 2004 are being anticipated on the back of economic recovery, but this could force a cut in ECB rates.

In an extensive review of the global economic outlook US merchant bankers Brown Brothers Harriman (BBH) said the euro’s strength will continue to the end of 2004. It forecast:

The euro will hit $1.25 in the last quarter of 2004.

The dollar’s decline will seriously damage euro exports and could force the ECB to lower interest rates

Economic growth in the US this year will be 2.6%, climbing to 3.8% in 2004. In 2002 the figure was 2.4%. The 2003 figure was revised up from a previous forecast of 2.1%.

EU economic growth will slow further, falling from 0.8% last year to 0.5% in 2003 recovering to 2.2% by end 2004. Previous forecast was 0.6% for this year.

Japan will grow 2.8%, up sharply from 0.2% in 2002 but will fall to 1.8% next year due to anticipated gains also against the dollar.

Overall BBH say the recovery story is starting to look real, stressing ‘sustainability questions linger for the US and Japan’.

In its review BBH say current difficulties in the US have finally caught up with the dollar and it will continue to weaken.

Despite concerns over the deficit, underlying support for the US economy remains strong suggesting the “global economic recovery will gather pace”, it says.

The euro had its biggest one-day gain against the dollar in almost a month as ECB President Wim Duisenberg suggested gains in the currency won’t hurt economic growth. The dollar fell against the yen.

Duisenberg said the euro’s 11% rise against the dollar this year is ‘nothing special’. ECB member Matti Vanhala said in an interview that European companies will “have to cope’ with the stronger euro.

“There does seem to be more of an acceptance that the euro has to strengthen,’ said Lara Rhame, VP of foreign exchange research at BBH in New York.

“If we were at $1.25 tomorrow there would be an outcry, but $1.25 next year would seem pretty natural.”

The euro advanced more than 1% to $1.1786 in midday trade in New York from $1.1667 yesterday. The euro rose to 128.36 yen from 127.74. The dollar fell to 108.90 yen from 109.49, and the British pound reached a four-month high against the dollar.

The euro has gained 3.9% against the dollar and the yen has added 4% in just one month, since the Group of Seven called on Sept 20 for more flexible exchange rates, suggesting they favour a weaker dollar.