Dollar strengthens in Global Crisis

Dollar `Bear Market Is Over,’ Sell Euro, U.K. Pound, RBS Says 
By Anchalee Worrachate

Oct. 10 (Bloomberg) — Investors should buy the dollar while selling the euro and the pound because interest rates in Europe and the U.K. will fall faster than in the U.S., according to Royal Bank of Scotland Group Plc.

The dollar will strengthen to $1.25 per euro and $1.58 per pound by the end of next year, David Simmonds, head of currency research in London at the bank, wrote in an investor report. The U.S. currency traded at $1.3507 per euro and $1.7031 against the pound today.

Dollar bets will pay off as the currency stops being used to pay for higher-yielding assets globally, in the so-called carry trade, amid the worldwide economic slowdown, Simmonds said. It will benefit longer term as the U.S. enters a recession, which will help narrow the current-account deficit, the report said.

“The multiyear dollar-bear market is over,” said Simmonds. “The dollar has been global-funding currency of choice for years. But in a globally de-leveraging world, money flows back into the greenback. The U.S. comes out of this crisis carrying a mix of a large public sector deficit that needs lots of funding and a small external deficit that no longer needs external funding.”

The euro is also at a disadvantage because countries sharing the currency are trying to address the credit crisis with individual fiscal policies instead of devising a common strategy, the report said. Meetings this week of euro-area finance ministers failed to agree on steps to shore up the banking system hours after their countries’ leaders pledged to do whatever was needed to restore confidence.

“This complicates the policy response to this crisis, and the way in which countries have moved unilaterally to provide various protections for their own national banks is a testament to that,” Simmonds said. “This structural weakness for the euro can be ignored for years at a time because it only matters at times of acute strain. Like now.”

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