February 2, 2003	Sunday	Ziqa’ad 29, 1423

NEW YORK, Feb 1: The slump in the dollar, battered by investor fears about war in Iraq, has brought welcome relief to US manufacturers but could post some risks to the US economy, say analysts.

The decline in the greenback, down some 30 percent against major currencies since its peak in late 2000, helps make US products more competitive but also can create inflationary pressures and make it harder to attract needed foreign capital.

It’s good for exports so it helps the economy, said Henry Willmore, economist at Barclays Capital.

In 2001, US manufacturers had complained that the strong US dollar made their products too expensive on world markets and thus undermined US competitiveness, arguing that Washington should abandon the so-called strong dollar policy.

But some analysts such as Tobias Levkovich of Salomon Smith Barney note that these benefits are offset by problems of a weaker currency, including a rise in inflation — as imports become more expensive — and a reluctance of foreign investors to put their money in US-based assets.

Many suggest that this trend will drive foreign investors away, Levkovich said.

This trend “could weigh on the stock market” as investors shun dollar-based assets, adds Larry Wachtel at Prudential Securities.

US treasury bonds too, long seen as a safe-haven investment, could suffer, because foreign investors may lose in a declining dollar environment.

The dollar depreciation will cause foreigners to dump Treasuries, said Sung Won Sohn at Wells Fargo Bank.

The turmoil in the currency markets has some other effects as well. US multinationals like IBM get an earnings “lift” because profits made outside the United States are worth more, when converted into dollars.

We think that the dollar’s year-long slide against major currencies is starting to pay dividends for Corporate America, note Morgan Stanley analysts Richard Berner and Rebecca McCaughrin.

It is helping the top line by promoting a rebirth of pricing power for US companies. Multinationals are seeing their overseas results translate into more dollars. And while the results probably won’t show up for as long as a year, it will help US producers gain global market share.

Meanwhile, the falling dollar is likely to exacerbate the surging US trade deficit in the short term, but is likely to reduce this gap in the long-term as US products become more competitive.

But a report by Merrill Lynch said that it will take a further drop in the greenback to correct the gap in the current account deficit, a broad measure of trade in goods and services.

It will require another 20 per cent decline in the greenback to bring the current account deficit, now at five per cent and still growing, back into its historical margin of two per cent, they wrote.

The dollar’s decline is so far beneficial for the global economy but this may not last, notes Stephen Jen at Morgan Stanley, who says that European authorities may end up with the problems of a strong currency and may end up cutting rates.

Jen also notes that many Asian economies are linked to the dollar and have major central bank holdings in dollars. These countries would try to maintain a stable dollar.

In this fragile global economic environment, it is almost inconceivable for Asian countries to permit a free-fall in the dollars, he said. I would expect massive interventions out of Asia to keep the dollar supported. Ironically, the dollar cannot crash because the world cannot afford to let that happen. —AFP