Dollar to Extend Slide as Global Economy Recovers, Pimco Says

By Yoshiaki Nohara

Oct. 19 (Bloomberg) -- The U.S. dollar will extend declines as the global economy’s recovery prompts investors to shift away from U.S. assets, according to Pacific Investment Management Co., which runs the world’s biggest bond fund.

Fundamental forces are set to put downward pressure on the dollar as the recovery gathers momentum, Pimco’s strategic adviser Richard Clarida wrote on the company’s Web site. Those forces include massive budget deficits, bets the Federal Reserve will keep borrowing costs near zero for an extended period, and prospects for a double-dip recession in the U.S., he said.

“An orderly decline in the dollar may help to rebalance global investment portfolios if, as expected, global investment flows -- both official and private -- continue to diversify away from U.S. assets,” Clarida said.

An extended period of dollar weakness is likely to hurt the U.S. economy, as the currency’s decline doesn’t offer a “free lunch,” Clarida said.

“Eventually, a weaker dollar will likely worsen the U.S. terms of trade, potentially slowing growth of U.S. living standards and, ultimately, U.S. demand,” he said.

Foreign producers who export to the U.S. may be willing to absorb some of the impact of the weaker dollar in their profit margins, Clarida said.

The U.S. Dollar Index, which measures the currency against those of six major trading partners, fell on Oct. 15 to the lowest level in 14 months and has dropped about 7 percent this year.

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net