Speakers Divided on Dollar's Fate At Forex USA Regional Meeting

Speakers at the Forex USA annual regional chapter meeting in Boston on June 23 disagreed about whether the dollar has the potential to recover or whether the currency is doomed to perennial weakness.

Dr. Wayne Ayers, chief economist for Bank of Boston, said he did not think that the dollar is uniformly weak. He argued that the best news on U.S. inflation "is behind us" and that the U.S. is close to bottom in terms of long-term rates.

In response to a question on Fed policy, whether there has been a shift since chairman Alan Greenspan recently cited the dollar's weakness as an impediment to lowering rates, Ayers said he seriously doubts that Greenspan's comments signalled a change in policy and that the Fed has never, and likely will never, gear policy towards dollar constraints.

Instead, he said, the Fed chairman was grasping for an explanation to put off an easing until August. Contrary to Ayers' view that the dollar is not inherently weak, Alan Ruskin, director of research for Idea in New York, said the dollar is endemically weak. But he argued that if the U.S. current account deficit is trimmed sharply, it would be "very encouraging" and market expectations could shift.

He added that the dollar would also be helped if surplus countries started recycling their surpluses (such as Japan), but took special note of the huge deficits being continually run with East Asia which, he says, is particularly poor at recycling surpluses.

Weighing against the dollar, Ruskin said developing countries are holding a shrinking share of reserves in the U.S. dollar. This is due to a fear of trade frictions, nationalism and a general tendency to diversify, moving out of dollar reserves, he said.

Anecdotal evidence that central banks in East Asia hold less than 50 per cent of their reserves in dollar assets points to an underlying theme that is eroding dollar support. "The U.S. needs to shift its view to East Asia from Japan," he said. Separately, he added that the bulk of the yen rally is over, although there is still room for some further strengthening.

Other speakers turned to Latin America. In a "Latin American Update," Mas Tsukagoshi, vice president and senior trader at Bank of Boston, said that the most important challenge for Mexico is to build an industrial sector, so that it does not have to rely on the weaker peso. For Brazil, he said, devaluation of the real is necessary, which the government is doing gradually.

Lincoln Rathnam, managing director and fund manager for the Latin America and high-yield bond group at Scudder, Stevens & Clark in Boston focused on international credit quality. He said emerging market issuers offer a superior risk/reward ratio than investment grade sovereigns (which are in decline).

At the closing night conference dinner, which drew about 200 participants, keynote speaker Said Signor, president of Fidelity Forex, Fidelity Investments, focused on the European Monetary System, outlining some of the fundamental rates in character, interest and inflation rates, that exist between the various countries. Given the rather wide variety of differences, Signor said that although it was a good idea, it is unlikely European Monetary Union would be seen by anyone in this lifetime.

During a discussion of Forex club business, Forex USA president Matt Lifson told delegates that the Association Cambiste Internationale (ACI) has decided to officially recognise American brokers as international brokers -- previously, American brokers recognised by Forex USA as international brokers were not considered as such by the ACI.

He also announced that nominations must be in by July 7 for four open Forex USA board seats that will be filled in September.