Dollar projected to recover moderately

The US dollar is projected to recover moderately against major world currencies during the second half of 2008 after it hit bottom this month and is seen undervalued by a majority of financial institutions and research studies around the world.

Merrill Lynch said in its Fund Manager Survey this month that the dollar is expected to strengthen modestly in the second half on a trade-weighted basis and positions by the fund managers seem to aligning in a similar direction.

"The dollar remains about 14 per cent undervalued against the G10 currencies, and we expect the adjustment to come primarily against the Anglo-Saxon currencies and the euro. With the end of the dollar decline, we expect the correlations in foreign exchange markets to drop, making differentiation among currencies important," Merrilll Lynch said.

The survey was conducted on fund managers with $615bn (Dh2.27trn) in assets and it showed the dollar value hit its bottom and will start an upward trend soon.

The same position was revealed by experts in forex markets. Sherif Sanad, head of marketing at London-based One Financial, said the dollar went weaker versus the euro this month after a report showed US consumer confidence fell in May more than economists forecast.

"American citizens want Treasury Secretary Henry Paulson to act to stop the dollar's decline, which has stoked inflation, eroding their household incomes.

"The US currency has slumped 41 per cent against the euro since 2002 and 13 per cent in the past 12 months alone.

"That has contributed to a surge in energy and commodity prices to record levels, and prompted central banks to reduce their share of foreign exchange reserves in dollars," he added.

"There are high expectations the Federal Reserve will hold interest rates at two per cent at its next meeting on June 25.

"So we are expecting the dollar to start strengthening over coming weeks due to the likelihood that the end of Fed rate cuts will boost the allure of US assets for international investors and boost the value of the dollar, while the European Central Bank (ECB) is expected to begin lowering rates in September. We are expecting the dollar to retouch the level of 1.5286 against the euro very soon," Sanad said.

Yaser Rawashdeh, sales trader at Saxo Bank, had told Emirates Business the eurozone economy is giving negative indicators of slowdown and the ECB may decide interest rate cuts.

The Merrill Lynch survey also showed that equity fund managers' outlook for the global economy had improved as fewer respondents believed that the global real economy would be weaker over the next 12 months.

A net 39 per cent expected a weaker real economy compared to 48 per cent in April and 49 per cent in March. This is well off the trough of 62 per cent in December 2007.