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The Dollar Still Has Legs

Economic Trends


After its dramatic spurt over the past month or so, the dollar's appreciation may slacken for a while, warns economist Michael R. Rosenberg of Merrill Lynch & Co. But the direction for the greenback is still up, he says.

Among the possible hurdles facing the dollar, says Rosenberg, are a concern among global investors that their portfolios may be too heavily weighted with dollar assets, and the currency market's belief that the dollar's current value against the yen and the mark is already at levels targeted by U.S., Japanese, and German monetary authorities. A third inhibiting factor is the current rally in U.S. Treasuries, which has reduced real interest-rate differentials favoring U.S. investments.

For dollar partisans, the good news is that fundamental forces should overcome these hurdles in the months ahead. For one thing, U.S. inflationary pressures seem to be subsiding, whereas high wage growth, service-sector price pressure, and the weaker mark seem likely to boost German inflation next year. Also, U.S. inflation expectations will be dealt a further blow if claims that the U.S. consumer price index overstates the actual inflation rate inspire action to revise the index and cut inflation-adjusted government outlays.

Given the deteriorating Japanese economy, Rosenberg also expects further dollar strength against the yen in the months ahead. The Bank of Japan's latest cut in its discount rate to a historic low of 0.5% underscores its awareness that the economy cannot recover without further monetary easing and a lower yen. And Japanese investors, faced with increasingly low returns on financial investments at home and the fact that the yen's ascent has finally halted, will inevitably move more funds overseas.BY GENE KORETZ

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