Bank of America Says Dollar Rally Is `Increasingly at Risk'

By Candice Zachariahs

Nov. 12 (Bloomberg) -- U.S. dollar gains are ``increasingly at risk'' toward the year-end as declining credit-market rates switch investors' focus to the slowing economy, according to Bank of America Corp.

The dollar has advanced 13 percent against the euro since the collapse of Lehman Brothers Holdings Inc. on Sept. 15 while the Standard & Poor's 500 index dropped 24 percent. Analysts forecast the U.S. economy will shrink 0.35 percent this quarter after an annualized 0.30 percent contraction in the three months ended September.

``A weak economy and declining stock prices are not a solid foundation for any currency over time,'' Robert Sinche, head of global currency strategy at Bank of America, wrote in a research note dated yesterday. ``Persistent strength'' in the dollar is ``more related to the unwinding of long positions'' in the euro and pound and not a sign of optimism about U.S. economic prospects, he said.

The dollar traded at $1.2607 per euro at 6:43 a.m. in London from $1.2522 yesterday in New York, when it rose 1.8 percent. Bank of America, the second-biggest U.S. bank by market value, predicts the U.S. currency will fall to $1.3800 by year-end and $1.4400 in the first quarter.

U.S. equity markets slid yesterday as General Motors Corp. tumbled to the lowest price since 1943 amid concern the automaker is nearing bankruptcy. A report showed Nov. 7 that America's unemployment rate rose in October to the highest level since 1994 as companies slashed payrolls.

The Federal Reserve has lowered its benchmark rate to 1 percent from 4.25 percent at the start of the year and has given out almost $2 trillion of emergency loans to stabilize financial markets and prevent the economy from sliding into a prolonged recession.

``The argument that the dollar remains strong because markets may be discounting an earlier U.S. economic recovery appears completely out of sync with the ongoing strains in the economy,'' wrote Sinche.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net