Miners start to take note of IMF gold sales talk

Section:

Dollar Rebound Likely Far Off
Even if U.S. Trade Gap Slims

By Nick Olivari
Reuters
Friday, February 11, 2005

http://www.reuters.com/newsArticle.jhtml?
type=reutersEdge&storyID=7605873

NEW YORK -- Dollar investors looking to U.S. trade data for clues to
the greenback's direction will be disappointed if history repeats
itself.

The outlook is for the dollar to decline further despite any
improvement in the nation's current account deficit, of which the
trade deficit is more than 90 percent.

The dollar had been helped in recent days by Federal Reserve
Chairman Alan Greenspan's turn last Friday to an optimistic view of
the U.S. trade deficit. Though the dollar index has since
surrendered gains and is flat on the week, it did gain as much rose
1.6 percent in the days after Greenspan's speech.

But based on observations since the dollar was freely floated in
1973, it will take almost a year for the dollar to rally after the
U.S. current account deficit begins to narrow. During that time, the
dollar could slide another 10 percent.

There's a long term cycle in play wherein the market loses faith in
the dollar because of the large imbalances, like the twin U.S.
fiscal and current account deficits. The resulting decline in the
dollar helps cure those imbalances, said Anthony Chan, managing
director and senior economist at JPMorgan Fleming Asset Management.

"It is precisely this phenomenon that makes foreign exchange markets
more comfortable with the dollar and eventually lead to a higher
value of the U.S. dollar."

However, Chan's research found that in the periods since 1973 when
the current account deficit has declined as a percentage of U.S
gross domestic product by 1 percentage point or more, the Federal
Reserve's major dollar currency index continues to decline for an
average of more than nine months before beginning to strengthen.

A year after the current account deficit began to improve, the
dollar was down an average 9.2 percent on average, and two years
after the current account troughed the dollar was still down 5.1
percent.

The current dollar drop, 28.4 percent in the Fed's major currency
index from early 2002 through to the third quarter of 2004, has
paralleled a widening in the current account deficit as a percentage
of gross domestic product from -4.1 percent to -5.6 percent.

But Fed chairman Greenspan told the Group of Seven finance minister
meeting in London last Friday that market forces may be about to
stabilize the U.S. current account deficit, and he said that the
White House was beginning to come to grips with the government's
fiscal deficit.

"The current account story will lose the force it had in 2004, but
it is still in the background and still wide," said Jeremy Friesen,
senior currency strategist at RBC Capital Markets in Toronto. "Just
the fear it is unsustainable will wind down."

Some investors may be heartened by Thursday's report from the
Commerce Department that indicated the trade deficit had narrowed to
$56.4 billion in December from a revised $59.3 billion in November,
though the trade deficit for the whole of 2004 reached a record
$617.7 billion.

Yet few investors are willing to say the trade gap, the main
component of the current deficit, has troughed. Some analysts reckon
the trade deficit would have to narrow for three or four consecutive
months to send a clear signal that the gap was trending narrower.

"It will take a while for people to mull over when we have turned
the corner," said Paresh Upadhyaya, a portfolio manager with Putnam
Investments in Boston. "We're going to need a series of events and
data."

All of which means while it may be just a matter of time before the
recent drop in the dollar leads to a sustained reversal in the
current account deficit, historical data indicates a rebound in the
dollar is a lot further out.

For now, that means more pain ahead for the dollar.

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