The US dollar is set to continue depreciating against sterling and the euro, which will hit unhedged...
The US dollar is set to continue depreciating against sterling and the euro, which will hit unhedged investment returns from across the Atlantic.
Since the start of 2002 to 13 May 2003, the dollar has fallen by over 10.5% against the euro and 11% versus sterling, according to Bloomberg, and consensus projections point to continuing weakness in the dollar.
Michael Deakin, chief investment officer at Insight Investment Management, says the news is not all bad and the decline of the dollar against the euro should provide a boost for US exporters and manufacturing companies.
'The weakening of the dollar should lead to an improvement in trade. However, this depends entirely on the underlying strength of the overseas economies and the level of demand for US goods,' Deakin says.
'It is widely anticipated the dollar will continue to weaken against the euro. Given that US demand is still stronger than much of the rest of the world, the current account deficit may continue to grow despite a weaker dollar, thereby requiring an even greater depreciation of the US currency in the longer term.'
John Hatherly, head of research at M&G Investments, says the value of the dollar versus other currencies has become distorted over the past four years due to the disparity of growth rates between the US and other economies.
He does not believe the US government is overly concerned by the depreciation of the dollar against other major currencies, as it is acting in tandem with the Federal Reserve's rate cutting policy to stimulate the economy.
'There is a view that the US government is happy to see the dollar decline. It has been cutting interest rates to improve economic growth and cutting the exchange rate has a similar effect,' Hatherly notes.
Constant speculation about whether the Fed will cut rates again in the near-term reflects the continued weakness of the US economy. The US government has lowered its growth expectations for 2003 GDP although the market is still factoring in a slightly higher growth rate.
'US GDP growth is forecast to be 1.5% to 2% in 2003, behind market consensus estimates of 2.4%, although this is expected to fall in coming months. This would represent the third consecutive year of sub-trend growth,' Deakin says.
Hatherly echoes Deakin's concerns that markets are relying on strong global demand for US products to bolster the economy.
While the dollar weakening against the euro should boost exports, key markets, particularly Europe and the UK, are suffering from similarly sluggish growth.
'Any impact on US exporters will be at the cost of other countries' market share and this could mean Germany, for example, is pushed into negative GDP growth figure for the year,' Hatherly adds.
While opportunities may exist within the manufacturing and other export-led sectors, Hatherly is still concerned with US equity valuations. Despite the correction of the last three years, he says they are still overvalued and risks such as falling consumer confidence, overcapacity and low levels of corporate expenditure continue to bedevil the market.
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