Dollar Doomsayers Draw Evidence From Bernanke Push to Cut Rates

By Bo Nielsen


March 17 (Bloomberg) -- Ben S. Bernanke's interest-rate cuts have touched off a vicious circle of doom for the dollar.

The Federal Reserve will likely lower its target rate for overnight loans between banks tomorrow to at least 2.25 percent from 3 percent, according to futures traded on the Chicago Board of Trade. As recently as September the rate was 5.25 percent. Lower borrowing costs work against the dollar by making fixed- income securities issued by the government less appealing to global investors.

``The relative return on U.S. assets is not attractive enough and we have moved back into looking for dollar weakness,'' said Robert Robis, a bond fund manager in New York at OppenheimerFunds Inc., which oversees $260 billion. Robis last month was betting the dollar would rally versus the euro.

If that weren't enough to make bears out of bulls, the weakest dollar since at least 1971 based on a Fed trade-weighted index is helping push oil, grains and metals, which are priced in the U.S. currency, to record highs. That in turn is causing economists to lower growth forecasts for the U.S. and preventing central banks concerned that inflation is accelerating from cutting interest rates, further undermining the dollar.

``The whole world feels there's inflation when a good part of that is the weak dollar itself,'' said Stephen Jen, head of global foreign-exchange research at Morgan Stanley in London. ``Watching the dollar plummet like this is very dangerous.''

Picking Up Steam

The dollar tumbled 6 percent in the past month against a basket of six major trading partners, the fastest pace of decline since May 2006. It fell to a record low against the euro of $1.5688 last week, before ending at $1.5674, and depreciated to 98.90 against the yen, the weakest since 1995.

Barclays Capital Inc., BNP Paribas SA, Morgan Stanley, Standard Chartered Plc, Bank of America Corp. and Credit Suisse Group cut their forecasts for the dollar in the last two weeks.

European Central Bank president Jean-Claude Trichet and Japanese Prime Minister Yasuo Fukuda said last week in interviews the plunge is ``concerning'' and ``undesirable'' for growth. Goldman Sachs Group Inc. and Morgan Stanley strategists say that coordinated action by policy makers to stem the currency's slide is increasingly likely. In intervention, central banks buy and sell currencies to influence exchange rates.

`Down the Tubes'

``It's hard to stimulate an economy when the currency is going down the tubes,'' said David Malpass, the chief economist at Bear Stearns & Co. The New York-based firm expects the dollar will fall to $1.60 per euro in 12 months.

The U.S. economy may expand 1.4 percent this year, according to the median estimate of 82 economists surveyed by Bloomberg News this month. The median in March was for growth of 1.7 percent.

Global investors see little reason to own U.S. financial assets with the two-year Treasury yielding 1.48 percent, or 1.73 percentage points less than similar-maturity German bunds. The gap reached 1.80 percent on March 6, the widest since 1992. Foreign purchases of U.S. financial assets slowed in each of the final three months of 2007, to a net $56.5 billion from $113.9 billion, according to the latest Treasury Department data.

As the currency fell, the UBS Bloomberg Constant Maturity Commodity Index of 26 commodities ranging from energy, metals, agriculture and live stock rose 43 percent in the past 12 months, the biggest increase since the index's inception in 1998. The price of a barrel of crude oil surged 89 percent in a year to an all-time high of $111 on March 13.

Commodities Hedge

``A lot of people out there are using oil and other commodities as hedge against a falling dollar,'' said Simon Wardell, manager of energy research at Global Insight Inc. in London. ``We could get to $120 in oil if we continue to see weakness in the U.S. dollar.''

The drop in the currency is responsible for about a third of the 230 percent rise in commodities since 2002, with the rest mainly attributable to demand from developing nations such as China, according to Morgan Stanley. The ICE Dollar Index moved in unison with the price of crude oil more than 97 percent of the time in the last year, according to Bloomberg data.

Relief may be in sight. The International Monetary Fund in Washington said last month that oil prices may be peaking as growth slows. The median forecast of 34 analysts surveyed by Bloomberg is for the dollar to gain about 11 percent against the euro this year and 4 percent versus the yen as the Fed's rate cuts spark the economy in the second half of 2008.

``If the U.S. dollar turns higher or if the crude oil market reverses then we have a spiral working the other way,'' said Tim Evans, an energy analyst at Citigroup Global Markets Inc. in New York. The price of crude oil will at $70 by September, Evans said.

`Major Concern'

The ECB is one of more than 12 central banks that cited faster inflation as the reason for raising or keeping rates unchanged this year.

``The surge in oil prices is a major concern and I don't think it leaves us any room for a loosening of our monetary policy,'' said Axel Weber, member of the ECB's Governing Council, in Frankfurt on March 11.

Inflation in the euro zone rose at a 3.3 percent annualized pace last month, the fastest in 14 years, the European Union's statistics office in Luxembourg said March 14. Consumer prices in the U.S. were unchanged in February, the Labor Department said.

Kenneth Rogoff, the former chief economist at the IMF and now a professor at Harvard University, said the greenback may drop another 12 percent on a trade-weighted basis.

``This recession will be long and deep and when we get out of it, we'll have inflation,'' Rogoff said in an interview. ``Confidence in the dollar is down.''