No hastening expected in Fed''s interest rate increases


By Christopher Nobel
Sunday, January 30, 2005

DAVOS, Switzerland -- Look out below.

That appeared to be the consensus about the U.S. dollar's future
among many of the participants leaving this small Alpine ski resort
at the end of the World Economic Forum's annual meeting.

U.S. corporate leaders, academics and some policy makers warned of
further declines for the battered greenback, though none predicted a
sudden, uncontrolled fall that could lead to a currency crisis and

"The U.S. dollar is no longer a stable currency, it's devaluing all
the time," said Fan Gang, Director of China's National Economic
Research Institute, China Reform Foundation.

The expectation that the dollar will fall more was likely to be a
source of tension at the meeting in London this week between the
United States and its chief economic partners in the Group of Seven
(G7) rich countries.

G7 members including Britain, France, and Germany have sharply
criticized Washington for not doing more to reverse the dollar's
decline against the major currencies.

"The sharp moves upward of the euro were unwelcome," European Central
Bank President Jean-Claude Trichet said on Saturday, adding that the
dollar's weakness was "counterproductive on economic growth".

The mood surrounding the dollar was so bleak that U.S. Undersecretary
of the Treasury for International Affairs John Taylor was moved to
tell reporters that he saw no reason for a dollar crash.

"There is nothing in play here except some good, sensible
policies. ... So I see no reason for that," Taylor was quoted as
saying by Reuters.

The twin budget and trade deficits, and the perception that the Bush
administration is willing to tolerate a weaker dollar have helped
undermine the currency, which has fallen steadily over the last three
years. The drop has caused some to lose confidence in the dollar and
raised fears that foreign investors, whose money is needed to finance
the deficits, may slow their contributions.

Evidence of this loss of confidence was revealed in a survey of
central bankers released last week, which showed that many had cut
their level of dollar reserves in favor of euros over the last two
years. The survey was carried out by Central Banking Publications.

Still more evidence of the lack of confidence in the dollar came from
Bill Gates, chairman of Microsoft Corp. and the world's richest man,
who said on Friday night he was betting the dollar would fall more.

"I'm short the dollar," Gates said in an interview held in front of
an audience of about 200. "The old dollar, it's going to go down."

A narrowing of the trade gap is seen by many as a crucial step to
restoring confidence in the dollar and helping it reverse at least
some of its recent declines.

Taylor and U.S. Trade Representative Robert Zoellick sought to
reassure participants that the United States wanted to cut the gap,
adding that the international community should help by boosting
growth in their own economies. They also repeated calls for China to
let its currency rise against the dollar, which would be another way
to cut the trade deficit.

But on the second front at least, Washington got some bad news on

Huang Ju, executive vice-premier of China, said Beijing needed to
reform its banking sector and work on opening its markets before it
changed its current policy of pegging the yuan to the dollar at a
fixed rate.

"We have no specific timetable" to change foreign exchange policy,
Huang told the conference.

The comment was a blow to Western countries, which for over a year
have been putting pressure on Beijing to revalue its currency and had
hoped that progress could be made at the G7 meeting that begins
Friday in London.

The other way the United States could help the dollar would be to cut
its budget deficit, which would help restore confidence in the
solidity of the currency.

The Bush administration has pledged to halve the deficit over the
next four years, but with an expensive agenda of tax and social
security reforms and the war in Iraq it is not clear they can live up
to that promise.

Right now the budget shortfall is expected to hit $368 billion in
2005 after $412 billion last year. The 2005 forecast excludes about
$100 billion in spending on the war in Iraq and fighting in

Despite the expectations of more declines for the dollar, the foreign
exchange markets appeared to take the developments in stride. The
dollar was trading at about 1.304 euros on Sunday in Davos, compared
to 1.3078 on Wednesday, when the meeting started.

And despite the public pronouncements on the dollar's future
weakness, there was evidence that some major corporations were
budgeting for a dollar that remained stable or declined only modestly.

For instance, Henning Kagermann, the chief executive of German
software giant SAP, said his company was budgeting for a dollar at
about 1.30 euros in 2005. And Maurice Levy, chief executive of
international advertising leader Publicis, said his company budgeted
for a dollar at 1.32 euros.

"Maybe that is a little bit pessimistic, maybe it is a bit
optimistic, I don't know, but that is where we put it," Levy said.


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