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Updated Tuesday, November 24, 2009 2:08 pm TWN, By Bo Nielsen, Bloomberg

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Top analysts see dollar slump persisting

Twenty-four of 37 predictions for the end of next year have the U.S. dollar strengthening against the euro. The median is US$1.47, up 1.7 percent. Twenty-seven of 31 strategists see the yen also getting beaten. The U.S. currency will gain 13.6 percent to 101 yen, from 88.87 Monday, the median shows.

“The dollar will gain support as soon as the Fed starts to rein in liquidity,” said Lee Hardman, an analyst in London at Bank of Tokyo-Mitsubishi UFJ Ltd., Japan's biggest lender by market value. The dollar will strengthen 10.7 percent to US$1.35 per euro by the end of 2010, the bank predicts.

The stock rally that pushed the MSCI World Index up almost 70 percent since March 9 will grind to a halt as the global recovery slows, spurring demand for the perceived safety of the dollar, according to Landesbank Baden-Wuerttemberg, which scored highest overall in Bloomberg's rankings with a 5.6 margin of error for all currencies.

“Financial markets and equity markets have been too optimistic concerning economic growth next year,” said Gernot Griebling, the Stuttgart bank's head of bond and economic research. “Risk aversion should rise again,” strengthening the U.S. currency to US$1.37 per euro by Sept. 30, he said.

For now, the global recovery is on track, with the Paris- based Organization for Economic Cooperation and Development doubling its 2010 growth forecast for leading developed economies to 1.9 percent and predicting a 2.5 percent expansion for 2011. The recovery is fueling investments in higher-yielding currencies funded by selling dollars.

The Dollar Index has fallen 15.5 percent since March 5, a steeper drop than in any eight calendar months in 23 years. The decline began four days before the Standard & Poor's 500 Index of stocks started its strongest rally since the 1930s, gaining 60 percent.

Fed Chairman Ben S. Bernanke said on Nov. 16 that “significant economic challenges remain” in the U.S. and reiterated the Federal Open Market Committee will keep borrowing costs low for an “extended period.”

Policy makers may not change course until 2012, Federal Reserve Bank of St. Louis President James Bullard said Nov 18.

“If you look at the last two recessions, in each case the FOMC waited 2 1/2 to three years” after they ended to raise rates, Bullard said.

What happened after those moves convinces Standard Chartered's Henderson and Scotia Capital's Sutton that the dollar will keep sliding. HSBC, the top pound-dollar forecaster, and Aletti Gestielle, the best on the dollar versus the yen, also say the greenback will depreciate, to US$1.50 and US$1.60 per euro by mid-year, respectively.

The dollar will weaken “as investors worry about its status as a reserve currency and the public deficits,” said Sutton, a former Ontario Municipal Employees Retirement System money manager.

The U.S. budget deficit reached a record US$1.4 trillion in the fiscal year that ended Sept. 30. Its debt amounted to 9.9 percent of the economy, up from 2004's average of 3.5 percent.

Central banks that disclose which currencies they hold put 63 percent of their new cash into euros and yen in April, May and June, the highest percentage for any quarter when global reserves grew more than US$80 billion, Barclays Capital data show.

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