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By Brian O’Mahony, Business Correspondent FURTHER weakness in the US dollar has not been ruled out by experts in the short-term as nervousness about the depth of the economic recovery remains uncertain.
What is more, most analysts this side of the globe expect the US/euro relationship will become more balanced as investors take a more realistic view of the outlook for growth in the world’s biggest economy in the years ahead.
In the short-term, the dollar may stay in that tight band of 97/98 cents where it has been for the past week.
This tightness of the exchange rate band has been attributable to some confidence about the future direction of the US economy.
While the markets were forecasting a cut in US rates on 24 September after the last statement from US Federal Reserve Chairman Alan Greenspan that sentiment looks to have changed again, but Geraldine Concagh, senior economist, AIB Corporate & Commercial Treasury, says the mood has become more positive as concerns about corporate America eased somewhat in recent weeks.
Senior Fed officials in the US have also begun pushing the view that the economy is on a growth path that does not need a further interest rate cut.
That leak to the markets in New York has serve to put a floor under the US currency as investors wait for the next round of economic data for August due to start to flow next week.
Critical to the dollar, Ms Concagh says, will be the performance of the US consumer. Any further indication of loss of confidence in that critical index could undermine the dollar’s short-term value But Ms Concagh says the US and the euro are also in the process of redefining their relationship.
Initially after it’s launch the euro was seen as weak relative to the might of the dollar and the prospects for the economy driven as investors saw it by an unstoppable high tech revolution.
That view has changed and the confusion about the state of the US and whether it will double dip or not is the reason the euro rose above parity against the dollar back on July 15 for the first time in two years.
At its flotation, the euro opened at $1.14 and fell pretty rapidly shortly after its launch. It failed to make parity until mid July 2002, a position it held only for a short while.
It has risen significantly since last March from 87 cents to the current levels of 97/98 cents.
In the meantime, it is possible for the euro to move into a range of $1-$1.05 and possibly higher than that before the year end. By the second half of 2003 Ms Concagh expects the euro to be trading within a range of $0.95-$1.00 as the US reestablishes as the economy with the better prospects compared with the eurozone.
Much will hinge on the economic data out of the US and the avoidance of a double dip, that still cannot be totally dismiss in the current uncertain climate, she added.