Bad forecast as dollar hits new lows

THE markets stepped up their continuing vote of no confidence in the dollar yesterday, as the greenback fell to new lows against the euro and exporters were warned of worse to come.

The euro touched $1.3047 for the first time as renewed selling of the dollar sent the single currency past its previous high watermark of $1.3005, which was set last week. It retreated slightly in later trading towards $1.3035.

But there will be no dollar recovery in the near term and the euro can be expected to teeter around the $1.40 mark over the next 12 months, Ulster Bank financial markets strategist Niall Dunne said last night.

Speaking at a conference in Limerick's Clarion Hotel, Mr Dunne said today's economic conditions closely resembled the early 1970s, when the dollar began a sustained slide on the back of a record budget deficit.

Mr Dunne said the re-election in 1972 of then American President Richard Nixon coincided with a costly war in Vietnam and a worsening budgetary situation. "Republican President George Bush has just been re-elected with the worst budget deficit in history and America is involved in another war," said Mr Dunne. "In Nixon's case, the value of the dollar fell and, in Bush's second term, we look for history to repeat itself."

The dollar would fall to $1.33 before the second quarter but would continue to tumble before bottoming out at $1.39 by year end, said Mr Dunne. Markets would continue to drive the dollar down against other major currencies in light of the Bush administration's economic policies.

Mr Dunne also warned that authorities in America and Europe could make the same mistakes as in the 1970s, when the risk of inflation was underestimated and interest rates were kept low in response to a surge in oil prices. But there was now a risk of a "sharp" rise in interest rates in America, where rates threatened to go from 2% to 4%.

European rates would follow those in America in due course and the base rate in the eurozone was likely to rise 0.75% to 2.75% over the next 12 months, he said. "Central banks are keeping interest rates low in response to higher oil prices, just as they did in the 70s."