Top analysts see dollar slump persisting

Standard Chartered Plc, Aletti Gestielle SGR, HSBC Holdings Plc and Scotia Capital Inc. say the dollar will depreciate as much as 7.1 percent versus the euro. About US$12 trillion of fiscal and monetary stimulus, the world's lowest borrowing costs and a record US$4 trillion of government bond sales between 2009 and 2010 will weigh on the currency, they said. So will the nation's 10.2 percent unemployment rate and signs that the economic recovery may falter, they said.

“History tells us the dollar shouldn't start rising on a sustained basis until 12 months after the Fed starts to lift rates,” said Callum Henderson, the Singapore-based global head of foreign-exchange strategy for Standard Chartered.

The best forecaster of the dollar against the euro in the six quarters ended June 30 in Bloomberg's ranking of 46 firms last month predicts the greenback will weaken 5.4 percent to US$1.58 per euro in 2010, from US$1.4944 Monday.

“It'll take time to drain the oversupply of dollars from the market,” Henderson said. “The dollar will remain weak until the Fed's rates rise above the competitors'.”

The U.S. will be one of five economies represented in the Group of 10 to wait until after mid-2010 to raise benchmark rates, according to median predictions in Bloomberg surveys of as many as 60 economists. The Fed, the European Central Bank, the Bank of England and the Swiss National Bank will increase borrowing costs in the third quarter and the Bank of Japan will remain at 0.10 percent at least through March 2011, the surveys show.

By the end of 2010, only Japan will have lower borrowing costs, and those will be higher when adjusted for inflation, the forecasts show. The Fed's target for overnight loans between banks will be 1 percent, compared with the ECB's 1.5 percent benchmark.

U.S. borrowing costs will make dollar-based assets less attractive, said Camilla Sutton, the foreign-exchange strategy director at Scotia Capital in Toronto. The Bank of Nova Scotia unit, the most-accurate forecaster of the dollar versus the Swiss franc in Bloomberg's rankings, predicts 2010 will end with the greenback weaker at US$1.60 per euro.

Once the Fed raises its target, the dollar's performance likely will mimic the pattern that followed the central bank's past three rounds of increases, Sutton and Henderson said.

After policy makers started boosting borrowing costs in July 2004, the Dollar Index tumbled 10 percent and didn't get back to where it had been before the first increase and stay there for more than a month until November 2005.

Intercontinental Exchange Inc.'s dollar gauge fell 6 percent and took seven months to recover after the Fed began lifting borrowing costs in July 1999. It dropped 16 percent following the Fed's 1994 move without regaining lost ground until 1997.

The top forecasters are in the minority, with median predictions in Bloomberg surveys of as many as 43 strategists showing the dollar gaining against the euro, yen, Swiss franc and Swedish krona by Sept. 30. The other two currencies measured by the Dollar Index, the pound and Canada's dollar, will outperform the greenback by 0.3 percent and 2 percent, the projections show.

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