markets & strategies
Investors should sell their US dollar investments and even short the currency in the face of a predicted 5% to 10% valuation slump against all the major currencies, according to Legal & General (L&G).
Meanwhile, Gartmore has stated that it too believes the dollar will fall and is instructing its fund managers to react appropriately.
The cause of this weakness is mainly the widening of the current and budget deficit, according to Andrew Clare, an economist for L&G. He said: "The current account trade deficit is more than $500bn and represents more than 5% of total US GDP. It is increasing at a rate of $1bn every day and by the end of 2004 the deficit could represent more than 6% of US GDP.
"To fund this shortfall the US government has been issuing treasury bonds, which Japanese and other Asian central banks have been buying. However, since June the currency-adjusted returns for foreign investors on their treasury portfolios have been negative."
There is a possibility foreign investors could stop buying US treasuries at current yield levels or start selling them and this could cause the dollar to decline dramatically, Clare added. But he believes the likely scenario is instead, the dollar will weaken over the next 12 months between 5% to 10% against other major currencies. These conditions make it favourable for managers to short the dollar.
Bob Jolly, head of fixed income and currency portfolio construction at Gartmore, has a similar view.
He said: "The dollar has weakened quite a lot already. Expect it to weaken further as the US has a big current account and budget deficit and negative real interest rates.
There is a risk of the dollar collapsing as things are growing worse. Over the next 12 months geopolitical concerns and trade tensions are likely to drive the dollar down."
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