Ailing dollar poised for rebound in 2008

Min Zeng
Bloomberg News
Sunday December 9, 2007

At a time when everyone from billionaire investors such as Warren Buffett and Bill Gross to celebrities want nothing to do with the dollar, a growing number of strategists say the stage is being set for a rally in 2008.

The U.S. budget and trade deficits are narrowing in tandem for the first time since 1995, when the currency gained 8 percent as measured by the Federal Reserve's Trade Weighted Dollar Index.

''I am confident that the dollar will have a significant rally next year, especially against the euro and the pound,'' said Stephen Jen, the London-based head of currency research at Morgan Stanley, who expects the currency to strengthen to $1.35 by December 2008. ''The deficits are shrinking fast.''

The 13-nation euro currency bought $1.4655 in trading Friday, up from from the $1.4633 it bought in New York late Thursday but well off its record high of $1.4966 set Nov. 23.

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Although Berkshire Hathaway Inc. Chairman Buffett and Pacific Investment Management Co.'s Gross say investing in U.S. financial assets is a losing proposition, improvements in deficits may provide a respite for the dollar after it tumbled 12 percent this year.

The currency may appreciate 7 percent against the euro from its record low in November, according to the median forecast of 38 strategists by Bloomberg. Deutsche Bank AG expects the dollar to rise 4.3 percent.

Royal Bank of Scotland Group reversed its outlook last week and predicts the dollar will appreciate.

A depreciating dollar has helped American exports rise to records in each of the past seven months, the longest streak since 2000. The trade deficit narrowed to $56.5 billion in September from the record $67.6 billion in August 2006, data compiled by the Commerce Department show.

Both President Bush and Treasury Secretary Henry Paulson have hailed exports as a bright spot in an economy that's mired in the worst housing slump in 16 years. A narrowing deficit means fewer dollars are being converted to foreign currencies through trade. Treasury sets dollar policy.

The budget deficit for fiscal 2007 ending Sept. 30 shrank to $162.8 billion. It is the smallest shortfall since $158 billion in 2002, and down from $413 billion in 2004.

Full article here.

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