Dollar's outlook is uncertain

Sharp differences in the outlook for the dollar emerged yesterday from rival financial institutions.

Bank of Ireland's Dr Dan McLaughlin sees the dollar strengthening marginally from its current rate of €1.33, while Mr Anthony Linehan, head of fixed interest products at KBC Asset Management says there is nothing to stop it sliding as far as €1.60.

The forecasts came as US President George W. Bush pledged to try to create conditions for a rebound of the weak dollar and said the latest Federal Reserve rate hike was an indication of concern about the currency. However, he said it was up to markets to decide the relative value of the currencies.

"The dollar is on a weakening path, and it is hard to see where it will end," said Mr Linehan yesterday.

"To keep the dollar at its present level requires 80 per cent of the world's savings every day to fund its deficit."

However, Dr McLaughlin, chief economist at Bank of Ireland Global Markets, sees rising US interest rates putting upward pressure on bond yields and supporting the beleaguered currency against the euro.

In his outlook for 2005, Dr McLaughlin sees the euro/dollar rate coming back to €1.30 by the end of this year, with the US currency strengthening to €1.25 in the first half of 2005 before weakening again.

He forecasts, however, that it will still end 2005 on €1.30.

On interest rates, Bank of Ireland Global Markets sees the US interest rates rising by a quarter point every three months through 2005, ending the year at 3.25.

Dr McLaughlin expects the European central bank to start raising rates before the end of June, adding 75 basis points to the existing 2 per cent rate by year end.