Dollar set to weaken against euro

The dollar is set to weaken gradually against the euro as the year progresses and could touch $1.20 by early 2004, economists believe.

The US currency, which has weakened by about 4 per cent against the euro this year after falling by almost 9 per cent last year, is currently trading at levels between $1.07 and $1.09.

According to Mr Robbie Kelleher, chief economist with Davy Stockbrokers, the slide will continue as long as the ailing US economy finds it difficult to attract capital needed to fund its burgeoning current account deficit.

The deficit, which requires investment inflows worth about $2 billion every day, is central to Mr Kelleher's view that the dollar could fall sharply to $1.20 against the euro by the end of the year.

He believes that the currency will come under pressure as investors shy away from assigning their cash to US assets.

"At current interest rates, they're finding it difficult to fund the deficit," he says.

Ulster Bank financial markets economist, Mr Niall Dunne, agrees that the dollar will find it hard to come off the lows touched over recent months.

Mr Dunne says that despite the relatively positive numbers issued last week by US corporates such as Citibank, worries continue to plague the US economy.

He cites a survey released by a respected group of US chief executives last week which revealed that they are more concerned about the weakness in their economy now than they were six months ago.

He is expecting the dollar to close the year at about $1.10 against the euro, or possible $1.13.

Mr Dunne acknowledges that $1.20 could be achievable over a longer-term scenario if "more bad news" emerges, but points out that Japanese intervention to prevent such an extensive slip would be likely.

Both economists point out that any slide in the dollar against the euro over coming months will be attributable to US economic weakness rather than buoyancy in the euro zone.

"The euro is only strengthening by default," Mr Dunne says.

Mr Rob Haywood, senior foreign exchange strategist with ABN Amro in London, also believes that the risks to the dollar are on the downside, noting that prolonged gloom in the US economy could push the euro through its launch level of $1.17 later in the year.

For now however, Mr Haywood is maintaining a view that the US economy will recover slightly over the winter.

He says a move to $1.13 is in prospect for the dollar but believes it could be "a painstaking process" characterised by peaks and troughs.

He forecasts a year-end level of $1.08.