The US dollar has weakened on the back of disappointing reports that the US economy is not reboundi...
The US dollar has weakened on the back of disappointing reports that the US economy is not rebounding as fast as previously expected.
According to Bloomberg reports, the dollar fell 3.3% against the euro over the month of April, while consumer confidence and employment reports show the US is not recovering at a rapid rate.
As of 26 April, the dollar was trading at 90.18 cents against the euro and, having dropped 3.6% against the yen over the month, was buying ¥128.01.
Keith Skeoch, chief investment officer at Standard Life Investments, says: 'In the past few weeks and months, an interesting change has taken place in the mighty US dollar. There have been signs it has begun to fall away, in terms of the interest among international investors.'
Skeoch does not believe the recent dollar weakness should be seen as a danger sign but instead should be considered proof the efforts of central banks and governments are paying off in reflating the global economy. Rather than comparing the dollar against only two of its trading partners, such as Europe or Japan, it is more telling to look at the value of the currency against all the major trading partners, he says.
The Bank of England does these calculations on a daily basis and shows that in the period 1995 to 2001, the US dollar rose by more than 40% on its trade weighted index. However, the Bank's measure shows the dollar has been more mixed in 2002, trading in a sideways range, Skeoch adds.
'The dollar was held up in 2000 and 2001 by considerable capital inflows from other countries keen on buying US assets,' he says. 'These principally included American companies, shares on the stock market and corporate bonds. More recently, questions about accounting practices and the quality of earnings data in the States have discouraged overseas investors. It is noticeable that 80% of the largest M&A deals that took place in the first quarter of 2002 were in Europe, not the US.'
At the same time, Skeoch notes, there are signs US investors are more interested in investing overseas. With surveys suggesting fund managers are broadly convinced the efforts of the central bankers and finance ministries will engineer a rebound in global activity into 2002, the expensive nature of the US equity market compared with stock markets overseas is encouraging US investors to consider alternatives.
This is benefiting the Asian and emerging economies, which are looking cheap on historical valuations. Bob Yerbury, manager of the Invesco Perpetual International Core fund, says despite the improving outlook for the US economy, he remains underweight the US market due to valuation concerns. 'We favour selected Asian markets that are trading below their long-term P/E averages and are sensitive to rising global economic activity,' he adds.
Skeoch says: 'Japan has attracted some interest for its blue chip exporters, while the Pacific Basin is considered a leveraged play on the recovery in global exports. The largest equity market is clearly Europe and it is therefore no surprise the euro has begun to rise slowly against the US dollar during 2002.'
Dollar slide a positive for other markets.
Asian markets considered good value.
Euro growing in strength.
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