Reduced spending by indebted U.S. consumers and robust domestic demand in developing countries will keep the dollar from staging a speedy recovery over the coming years, a Bank of America strategist said on Wednesday.
Robert Sinche, head of the bank's liquid products strategy, said in a note to clients that high U.S. consumer debt, falling home prices and tight credit conditions will force Americans to put away their credit cards and start saving more income.
That will prevent the Federal Reserve from hiking interest rates too aggressively in the coming years, he added, allowing a relatively weak dollar to continue boosting U.S. exports.
"Sluggish U.S. domestic demand and only gradual Fed tightening in the next year or two will limit the magnitude of the dollar's gains," Sinche told Reuters in an interview.
Meanwhile, rising wealth and living standards in China, India and elsewhere will boost consumption and ensure willing markets for U.S. products, which should continue to reduce the U.S. current account deficit.
Future dollar weakness will likely come mostly against the Japanese yen, Chinese yuan and other emerging Asian currencies, he said.
The gap in the U.S. current account, the broadest measure of trade and investment flows, narrowed in 2007 to 5.3 percent of gross domestic product, from 6.2 percent the prior year. It was the first annual decline since 2001.
"While it might seem logical that a narrowing of the current account deficit could contribute to a rapid recovery in the dollar, it actually appears more likely that the expected sluggish recovery in consumer spending associated with the after-effects of the credit crisis will contribute to a more sluggish appreciation of the dollar," he wrote.
Reuters
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