Consensus in Davos is that dollar hasn''t yet hit bottom

Section:

By Stella Dawson
Reuters
Saturday, January 29, 2005

http://www.reuters.com/newsArticle.jhtml?
type=businessNews&storyID=7474266

DAVOS, Switzerland -- The U.S. current account gap is unlikely to
narrow this year, putting stress on the U.S. dollar which is risky
for the global economy, European Central Bank Governing Council
member Axel Weber said on Saturday.

In an interview with Reuters Television on the sidelines of the World
Economic Forum, Weber said he did not see a danger that the dollar
would tumble by another 15 to 20 percent, as some economists have
warned at meetings of global business leaders in the Swiss resort.

"That is a bit outside the usual expectations that we have for
exchange rate models," he said.

But Weber said the dollar's weakness -- it has shed some 20 percent
of value in trade-weighted terms over the past two years -- clearly
is a risk. The United States cannot rely solely on a weakening dollar
to correct its current account deficit.

"One of the issues that clearly is there is that the dollar has been
a risk for the global economy in the past year," Weber told Reuters.

"A lot of focus in financial markets has been the current account
deficit in the U.S. I expect even in the next year that situation on
the current account will not change fundamentally; therefore, the
dollar risk will probably remain with us."

"The dollar exchange rate can play a part in that adjustment process,
but surely the adjustment cannot just take place just by movements in
relative price," he said.

Moreover, the 12-nation euro zone region has been bearing more than
its fair share of the dollar's tumble relative to its trading
relationship with the United States, he said.

To address these problems, Weber said the U.S. must improve its
savings rate, just as Europe must tackle its structural barriers to
growth -- all issues that will be on the agenda when the Group of
Seven finance ministers and central bankers meet in London next week.

There are some positive factors though on the currency front that
should alleviate stress, Weber said -- namely the credit tightening
cycle that the Federal Reserve already has begun.

"You also have a normalization of interest rates, so you have there
are some effects that would actually speak to a slight strengthening
of the dollar," he said.

The Fed over the past half year has tightened rates by 125 basis
points to 2.25 percent, lifting its key rate above those in the euro
zone, a factor that usually helps support a currency. Moreover, the
Fed is expected to continue tightening steadily this year, while the
ECB is seen on hold at 2 percent least through the summer.

Weber also noted that the dollar movements have calmed recently after
the euro/dollar shot to a record high in December above $1.36 in late
December.

"After a relative strong dollar overshooting at the end of the year,
we saw a normalization. At the moment we are in ranges that are
somewhat more normal," he said.

For Europe and the Germany, Weber said the economies "have not really
suffered tremendously" from euro strength against the dollar. On a
trade-weighted basis the euro currency has only appreciated about two
percent in the past year, he noted.

However, it is a factor to watch. "It is a certain risk and it takes
a toll on the growth rate, but it is not major."

On oil prices, Weber said they are risk both to inflation and growth
outlooks for the euro zone.

"So it is one risk that will remain with us throughout 2005.

"Most recently now that we have had an oil market recovery. This
signals that we are below the highest levels but not far below and
that the direction has started heading upward."

Weber, who is also president of Bundesbank, declined to talk about
monetary policy and the European economic outlook ahead of the ECB's
rate-setting meeting next Thursday.

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