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NEW YORK - The greenback will rise in 2007, even as the United States economy slows sharply, as Asian central banks continue buying the American currency to keep their own currencies down and their exports competitive, says a British research firm.
London-based Lombard Street says a housing slump in the US will finally cause Americans to cut back on spending, while rising labour costs will prevent the Federal Reserve from cutting interest rates until the second half of the year.
But director Diana Choyleva says Asian states with large surpluses and export-driven economies will still need to recycle savings into US assets and keep their currencies from rising too rapidly against the greenback.
And with Americans saving more, "the supply of dollars will shrink at a time when demand for the dollar will be going up" and that will put upward pressure on it.
The outlook runs counter to a widespread FX market view the US dollar will weaken in 2007 amid slower growth and an expected decline in interest rates.
Choyleva said markets are pricing in a rate cut too soon.
"There's a big chance growth will be high enough in the near term to exacerbate the inflation outlook than low enough to help with inflation," she said. "The Fed will need to engineer a hard landing to get inflation back on target."
US consumer spending will fall, though, as home prices continue to slide. The National Association of Realtors reports existing home prices fell 3.5 per cent in October for the third straight month.
Rapid gains in home prices had been the main driver in recent years of US consumption, which comprises some two-thirds of gross domestic product.
Choyleva says the result over the next 12 months to 24 months will be a gradual unravelling of global financial imbalances caused by excessive American spending and excessive saving in Asia.
Even if the US spending spree ends, Asian states have assets to spare.
- REUTERS
