[Mb-civic] An article for you from an Economist.com reader.

Fri Dec 31 10:59:27 PST 2004

- AN ARTICLE FOR YOU, FROM ECONOMIST.COM - 

Dear Civic,

Michael Butler (michael at intrafi.com) wants you to see this article on Economist.com.

(Note: the sender's e-mail address above has not been verified.)

Subscribe to Economist.com now and save 25% by clicking here now
http://www.economist.com/subscriptions/offer.cfm?campaign=168-XLMT

FURTHER TO FALL
Dec 29th 2004  

A new year is likely to bring a new low for the dollar

THE dollar ended the year as it began: heading downhill. It hit a new
low against the euro, below $1.36, on December 28th. Against the yen,
it was steadier: YEN103, slightly stronger than in late November. The
yen has risen by less than the euro because, although the Bank of Japan
has not intervened in the foreign-exchange markets since March, the
bank looks more likely to act than the European Central Bank. Japan's
finance minister, Sadakazu Tanigaki, gave warning this week that his
country's authorities would monitor foreign-exchange markets over the
New Year holiday. In contrast, Gerrit Zalm, the Dutch finance minister,
suggested that the euro's rise so far was acceptable. 

Since early 2002 the dollar has lost 37% against the euro and 24%
against the yen. But it has shed only 16% against the Federal Reserve's
broad basket of currencies, because many Asian currencies are pegged or
closely tied to the greenback.

 The cause of the dollar's decline is hardly a mystery: private
investors are less eager to finance America's huge current-account
deficit. The deficit widened slightly in the third quarter of 2004, to
a record $165 billion, or 5.6% of GDP. If the deficit remains so big,
America's foreign debt burden and hence its debt-service payments will
increase sharply.

 So far, America's mounting foreign liabilities have not harmed its
economy because the rise in its debt in recent years has been offset by
lower interest rates. As a result, America still enjoys a net inflow of
foreign investment income despite being the world's biggest debtor.
But, as interest rates rise, refinancing America's debt will become
more costly. Goldman Sachs forecasts that net foreign investment income
is likely to shift to a sizeable deficit during 2005, growing
thereafter. The investment bank estimates that, if America's
current-account deficit remains steady as a share of GDP and interest
rates average 5% in future, net foreign debt-service payments will
reach 4% of GDP by 2020--a significant drag on American living
standards. 

 By most measures the dollar is already undervalued, but experience
suggests that it will need to fall further still to cut the deficit to
a sustainable level, say 2-3% of GDP. Capital Economics, a London
research firm, forecasts that the dollar will fall to $1.40 against the
euro and to YEN90 by the end of 2005. But it expects the dollar to
recover against the British pound to $1.82 from $1.93 today, as British
interest rates are cut in the wake of falling house prices. 

See this article with graphics and related items at http://www.economist.com/printedition/displayStory.cfm?Story_ID=3524862

Go to http://www.economist.com for more global news, views and analysis from the Economist Group.

- ABOUT ECONOMIST.COM -

Economist.com is the online version of The Economist newspaper, an independent weekly international news and business publication offering clear reporting, commentary and analysis on world politics, business, finance, science & technology, culture, society and the arts. Economist.com also offers exclusive content online, including additional articles throughout the week in the Global Agenda section.

- SUBSCRIBE NOW AND SAVE 25% -

Click here: http://www.economist.com/subscriptions/offer.cfm?campaign=168-XLMT

Subscribe now with 25% off and receive full access to: 

* all the articles published in The Economist newspaper
* the online archive - allowing you to search and retrieve over 33,000 articles published in The Economist since 1997 
* The World in 2004 - The Economist's outlook on 2004 
* The US Election 2004 - providing dedicated coverage of the election, including articles from Roll Call, Capitol Hill's leading political publication 
* Business encyclopedia - allows you to find a definition and explanation for any business term 

- ABOUT THIS E-MAIL -

This e-mail was sent to you by the person at the e-mail address listed
above through a link found on Economist.com.  We will not send you any 
future messages as a result of your being the recipient of this e-mail.

- COPYRIGHT -

Economist.com privacy policy: http://www.economist.com/about/privacy.cfm