Ride the greenback.

Author:Siddiqi, Moin

The continuing Asian economic crisis has meant that global funds are increasingly seeking safe havens in the US and Europe. The greenback and European currencies remain strong but trouble could be brewing in the near future.

The Asian economic crisis has led to three major developments globally: there has been a slowdown in economic growth -- the IMF has revised downwards its projection of world output to from 4.3% to 3.5% in 1998; there has been a contraction in international trade, as imports in the ASEAN countries are curtailed; and finally there has been a reduction in outflows of foreign direct investment -- this will particularly affect developing countries.

On the positive side, the financial turbulence in the world's fastest expanding region has probably delayed hikes in the US and European interest rates over the near-term.

Dollar denominated assets, especially US treasuries, have emerged as safe haven investments for global funds. This in turn has underpinned the dollar since autumn 1997. The Swiss franc (despite having the lowest interest rates in Europe) and sterling have also enhanced their safe haven status, following the Asian debacle.

Investors are advised to maintain above average exposures in the US dollar, which still offers scope for currency gains during 1998. On an annualised period average, in 1997 the dollar appreciated 17% vis-[grave{a}]-vis the Swiss franc; 15% D-mark; 14% French franc; 11% yen. Sterling, on the other hand, appreciated 5% against the greenback.

The dollar should remain strong, especially against the yen and SE Asian currencies in the first half of 1998, as the US interest rate cycle is more advanced than its competitors. No one quite knows whether the turmoil in the SE Asian markets is over. However, further depreciations are likely unless fundamental economic and regulatory improvements, especially in the banking sectors, are made.

Technical factors indicate that the dollar's trading in the near-term will range between 1.75-1.82 D-mark, and 127-133 yen respectively. The greenback's upside potentials are 1.85-1.90 D-mark and 135-146 yen. However the dollar's advance is not without its risks, particularly a ballooning US trade deficit (projected by the IMF to be a record $230bn in 1998), as Asian stagnation reduces US export demand. A deflationary crisis, spreading to Latin America, could severely hit the dollar far harder than either the yen or European currencies because of the especially close...

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