Will the dollar capitulate in 2007 ? door Anatoly GOREV in RIA Novosti, 27 december 2007.
The year 2006 has been very unlucky for the U.S. dollar. In mid-December, the American currency hit a 20-month low against the euro.
The dollar's supporters were all the more disappointed because they expected different things from this year, which began quite optimistically.
In late 2005 and early 2006, the euro seemed to have lost all of its advantages against the dollar and began falling. Its decline was encouraged by accelerated economic growth in the United States and the Federal Reserve's move to increase interest rates. Many analysts started predicting that the unlucky period for the dollar would end in 2006. The dollar's slump to $1.33 per one euro by mid-December is unlikely to live up to the hopes and optimistic forecasts expressed at the beginning of this year.
Perhaps, it is these lost illusions that are making analysts of leading investment banks voice rather pessimistic forecasts for 2007. Currency experts maintain that the dollar's dynamics will still be influenced by the same factors, notably the economic growth pace in the U.S. and the EU, changes in interest rates in developed economies, and, of course, energy prices, which, despite a certain decline, still remain high enough to put pressure on the dollar.
Experts differ only in their estimates of how far the dollar may drop. Some say that it will fluctuate between $1.35 and $1.40 per one euro, while others predict far less pleasant figures for dollar owners, such as $1.50 or even $1.70 per one euro. Even more optimistic analysts do not fully rule out the possibility of a dollar apocalypse. "Given the risks associated with the dollar, investors who have put their money into dollar-denominated bonds might want to diversify their investment," said David Brown, chief economist at Bear Stearns, a leading U.S. bank. "Does that mean that the euro could rise to $1.40 or $1.50, or will it demonstrate only a "frying-pan jump" [a short-term leap followed by a return to the previous position]? We are inclined to believe the latter. We hate the very thought that the dollar is close to capitulating and that this capitulation, given the weakness of the American currency and the persistent pressure on it, may result in a collapse."
Remarkably, experts, prompted by the moves of oil-exporting countries, began discussing the possibility of the dollar's collapse earlier this year. The International Settlement Bank, which analyzes information from developed countries' central banks, announced in December that the share of dollar reserves in Russia and OPEC countries had fallen from 67% to 65%, while the euro's share had gone up from 20% to 22%. Given the net size of the reserves, a decline of two percentage points may seem insignificant, but analysts believe that oil exporting countries' decision to reshuffle their currency baskets is a signal to investors. The latter remember only too well what happened in 2003, when the same countries reduced the dollar's share of their reserves for the first time in many years: the euro soared immediately, reaching a new all-time high against the dollar.
So the outlook for the U.S. currency, given the country's not-very-fast economic growth and unfavorable external factors, is not too impressive. In Russia, it's the dollar's prospects are no better than in the rest of the world, experts say. Perhaps they are even worse. 2006 brought a decline in the dollar, but a triumph for the ruble: the exchange rate is already less than 26 rubles per $1. Next year, it may fall to 25 rubles. Unless the Russian Central Bank supports the U.S. currency or something happens to drastically change the situation on foreign markets (such as a plunge in oil prices), the rate may fall even lower.
The dollar's prospects for 2007 may be partially determined by the behavior of Russian borrowers and Russian banks. The former increasingly often prefer to take out loans in dollars because they are cheaper to service, since the U.S. currency is falling and the ruble is strengthening. Banks have responded to this demand by increasing interest rates for these loans. As a result, the average interest rate for short-term dollar loans reached 13.6% in October, according to the Central Bank. This is the highest level in the last few years. Experts say that such a high rate was seen only after the 1998 financial crisis. At that time banks wanted to protect themselves against non-payment, while now they are hedging against currency risks, primarily those posed by the U.S. dollar.