Skip to content
Link copied to clipboard

U.S. currency gets help from foreign investment

Dollar should rise in 2008

The dollar is poised to end a two-year slide against the euro in 2008 as government-backed investment funds in Asia and the Middle East buy U.S. assets, currency strategists say.

The U.S. currency will gain 4.4 percent to $1.40 per euro by the end of the third quarter, according to the median forecast of 43 strategists surveyed by Bloomberg News. So far this year, the dollar is down 9.8 percent to about $1.4638 per euro, after weakening more than 10 percent in 2006. That means it takes more than $1.46 to buy one euro. If the forecast is right, that would decline so it takes $1.40 to buy one euro.

These foreign funds - called sovereign-wealth funds - have bought stakes in Merrill Lynch & Co. Inc., Morgan Stanley, Citigroup Inc., and the Bear Stearns Cos. Inc. worth $20 billion. The firms sold the stakes to bolster their capital, which has been eroded by credit-market losses this year.

International purchases of U.S. financial assets totaled $114 billion in October, the Treasury Department said Dec. 17, the most in five months.

"Sovereign-wealth funds are getting cheap deals by buying some of these bombed-out assets," said Gerry Celaya, chief strategist at Scottish research company Redtower Ltd. "The U.S. economy is resilient and good at clearing out all the dead wood and bouncing back, and the dollar will follow."

The dollar depreciated this year as the worst U.S. housing slump since 1991 triggered $80 billion in write-downs at financial-service companies such as Merrill Lynch and helped prompt the Federal Reserve to cut interest rates three times in the last three months. A write-down is a reduction of an asset's value on a company's books.

The Japanese yen will rally for a second year against the dollar and end eight years of losses vs. the euro as U.S. and European economies slow, the strategists predicted in the survey.

The yen rose 4.75 percent against the dollar in 2007 to 113.66, but fell 5.5 percent vs. the euro to 166.42.

Merrill Lynch, reeling from the biggest loss in its 93-year history, received a $5 billion investment from Singapore's state-owned Temasek Holdings Pte. this week. China Investment Corp., set up to manage the country's $1.46 trillion of currency reserves, bought a $5 billion stake last week in Morgan Stanley, the second-largest U.S. securities firm. Citigroup said it received a $7.5 billion investment Nov. 27 from the Abu Dhabi Investment Authority.

"Asia and the Middle East know they need to lend some support to the dollar, or they're all going to lose out," said Tony Morriss, a strategist at Australia & New Zealand Banking Group Ltd. He forecasts $1.39 per euro next year.

A depreciating dollar boosted U.S. exports to a record in October. But rising exports will not prevent the U.S. economy from slowing to a 1.9 percent growth rate in 2008, lower than the 2.1 percent in Europe and 4.8 percent globally, the International Monetary Fund said.

"The U.S. has been in a six-year downtrend, and that's not going to turn around," said Greg Gibbs, a strategist at ABN Amro Holding N.V., the largest Dutch bank, which has the most bearish forecast at $1.53 per euro. "The U.S. will find it difficult to attract capital."