Dollar May Keep Falling, Yuan Gain, Strategists Say

By Thomas R. Keene and Matt Townsend

Aug. 26 (Bloomberg) -- The dollar will continue to weaken this year as the global economy recovers from recession and investors seek currencies linked to growth, strategists said in a panel on Bloomberg Radio.

“Investors in the U.S. and globally are sitting in too many T-bills and too much cash,” said Rebecca Patterson, global head of foreign exchange at JPMorgan Private Bank in New York. “As the world slowly gets better, they are going to want to take advantage of that. They want a better yield than you get in a T-bill, and that keeps the dollar under pressure.”

The dollar has weakened this year against 13 of the 16 most-traded currencies tracked by Bloomberg. Currencies tied to commodities and growth, such as the Brazilian real, South African rand and Australian and New Zealand dollars, gained the most against the greenback. U.S. Treasury notes and bills due in one year and less returned investors 0.4 percent this year, according to a Merrill Lynch & Co. index.

“We are still in the camp that the dollar has further downside to go,” said Callum Henderson, global head of currency strategy at Standard Chartered in Singapore. “You’ll see a renewed period of downside for the dollar, but more positively, upside for high-yielding emerging market and developed market currencies.”

European Recovery

Gross domestic product in Germany, Europe’s biggest economy, unexpectedly grew 0.3 percent in the second quarter from the first, the nation’s statistics office said Aug. 13, bringing an end to its worst recession in more than a half-century. France’s economy, the second largest among the 16 nations that use the euro, also unexpectedly exited a recession in the second quarter, with GDP rising 0.3 percent, the nation’s statistics office also said on Aug. 13.

The U.S. economy shrank 0.3 percent in the second quarter from the first three months of the year.

“In Europe, we have a much stronger economic outcome as many people believed,” said Hans-Guenter Redeker, the London- based global head of currency strategy at BNP Paribas SA. “German and French growth numbers have been a pleasant surprise for the second quarter.”

Redeker said the euro, which gained 2.3 percent against the dollar this year, may strengthen to $1.50. The euro traded at $1.4296 at 7:08 a.m. today in Tokyo.

JPMorgan’s Patterson said there are better ways to take advantage of increased risk appetite as the global economy recovers than investing in the euro.

“I look at the euro and I say the worries about the deficit and U.S. debt are mirrored in Europe,” Patterson said. “The euro doesn’t have the same reserve currency support that the dollar has. For a short-term trade, it’s fine. For a long- term diversification tool, I’d stay away from it.”

Reserve Role

The U.S. dollar may weaken as governments worldwide reduce the currency’s role in their foreign-exchange reserves, said David Wyss, chief economist at Standard & Poor’s.

“We do expect a bit of dollar weakness and expect the dollar won’t be as dominant in world reserves as it has been in the recent past,” he said today in Sydney at a conference. “It will still be the biggest reserve currency but we will go back to a more normal distribution, back to more like what we had 10 or 15 years ago when the dollar was 70 percent of reserves instead of 90 percent of reserves.”

China’s Domestic Demand

Strategists also said China’s ability to continue growth will depend on the nation changing from an economy driven by exports to one expanding on domestic demand, which may increase the value of the yuan. The People’s Bank of China said today in its 2008 annual report that the yuan’s exchange rate will be kept at a “reasonable and balanced” level.

“Asia is at a tipping point where you’ll see a transition from export-led growth to domestic-demand growth,” Standard Chartered’s Henderson said. “We’ve already seen the first stage with a huge focus on domestic demand, a huge focus on consumption. The next stage is surely a move away from a cheap currency policy toward stronger trade-weighted currency appreciation in order to dampen consumer costs.”

The pound may have to weaken for the U.K.’s economy to recover from recession, Paribas’ Redeker said. GDP contracted 0.8 percent from the in the second quarter from the first, twice as much as economists forecast.

“When you look at the situation in the British economy, it is very obvious you need substantial contributions from net exports in the next five to 10 years,” Redeker said. “That means the U.K. will have to adjust its cost structures drastically or operate with a much cheaper exchange rate.”

To contact the reporters on this story: Thomas R. Keene in New York at tkeene@bloomberg.net; Matt Townsend in New York at mtownsend9@bloomberg.net