The fate of the dollar over the next few months will depend on the outcome of the war in the Middle ...
The fate of the dollar over the next few months will depend on the outcome of the war in the Middle East. However, in the short term, the euro should strengthen, while the yen weakens with sterling sitting somewhere in between.
Jerry Toner, director of fixed interest at Foreign & Colonial, says: 'In the short term we think the dollar will remain reasonably firm. We expect the economy to pick up strongly following the fiscal policy measures the Fed has put in place.'
However, Toner warns the dollar may be at risk depending on how military events unfold in Afghanistan. He says the dollar is overvalued at the moment and it will fall. The dollar is presently around 90 cents to the euro and he expects it to go down to $1.05 to the euro.
Paul Griffiths, head of fixed income at Investec, agrees on the direction of the change, but not the scale. He says: 'We expect the dollar to move from 90 cents to 96 cents in the next few months.'
Griffiths predicts the euro will continue to strengthen against the dollar. As a result of the events from 11 September, consumer confidence may decline further in the US and tip the country into recession.
Toner says: 'The key is going to be military action ' whether it escalates, whether Iraq gets involved, and whether military action will over-ride economic fundamentals. If the situation calms, then we will only focus on economic fundamentals.'
However, if things get out of control it will be bad for the dollar. Toner warns that people will be looking to invest in safe haven currencies such as the Swiss franc. Switzerland is politically neutral and tends to attract money during times of international turmoil.
One currency that is expected to weaken against the dollar is the yen.
Toner says: 'The Japanese economy is in depression. In the short term the yen will weaken against the dollar. It is currently around ¥120 against the dollar and will go to ¥125. The government needs to adopt a monetary policy that can meet the economy's outright inflation target.'
However, sterling is caught between the dollar and the euro.
Griffiths says sterling is well positioned. If the euro is moving sharply against the dollar he expects sterling to underperform the euro and outperform the dollar. Toner predicts the pound will fall against the euro.
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