Dollar recovers after reduction in Chinese holdings of Treasuries is denied

Section:

Bank's Chief Economist Worries
Dollar May Fall by Another 15%

By Philip Thornton
The Independent, London
Friday, November 26, 2004

http://news.independent.co.uk/business/news/story.jsp?story=586869

The dollar could slump by another 15 percent, creating
a potential headache for the Bank of England, its chief
economist warned last night.

Charlie Bean said the implications for the UK economy
depended "critically" on the knock-on effect on the
pound and demand for UK exports. He said so far
sterling's rise against the dollar had been offset by a
fall against the euro, leaving UK competitiveness intact.
"But there can be no guarantee that this pattern of
'sterling-in-the-middle' will continue," he told
regional business leaders in East Anglia.

Mr Bean said economic imbalances in the US meant the
dollar would have to fall further to avoid a major
slump. The last time the dollar fell to eliminate current
account and trade deficits it crashed by 30 percent.
"To date it has only fallen 15 percent since its peak
so a further -- possibly substantial -- decline may
accompany closure of the current account deficit," he
said.

"The timing and nature of this adjustment are very
hard to predict and the implications for UK prospects
depend critically on what then happens to demand in
our major export markets and the impact on sterling."

Mr Bean's comments came as the euro surged through
the $1.32 barrier to push the dollar to a record low
for the fourth day in a row.

The pound inched higher versus the euro, pulling further
off an 11-month low set on Monday. Were the pound to
continue to rise against the euro, that would deliver a
double blow to exporters and put pressure on the Bank
to cut interest rates, economists believe. On the other
hand economists warn that the UK's housing bubble and
trade deficit could trigger a similar fall in sterling
that could drive up inflation. HSBC is forecasting a 10
percent drop in the pound/euro rate by 2006.

Mr Bean also reiterated the Bank's concern that house
prices may fall more severely than they expect and
trigger a larger decline in consumer spending -- which
would also open the way to a rate cut.

He echoed the warning in this month's Inflation report
that the low levels of inflation on the high street and
in the labour market might reverse, possibly prompting
the need for a rate rise.

Meanwhile the CBI warned that Gordon Brown would
have to raise taxes or cut spending in a third Labour
term, as it slashed its forecasts for growth and tax
revenues next year. The country's largest employers'
organisation said rises in interest rates and oil
prices and the slowdown in global growth would put
the brakes on growth in the UK.

It cut its forecasts for this year and 2005 by 0.3 of a
percentage point to 3.1 and 2.5 per cent respectively
and for the first time pencilled in growth of 2.6 percent
in 2006. It is the second time in three months the CBI
has cut its forecasts.

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