Thursday, 22 October 2009

DBS upgrades peso forecast for fourth quarter to 45.60:$1

Erik de la Cruz
Business Mirror

DBS Bank, Southeast Asia’s largest bank, has upgraded its US dollar exchange-rate forecasts for the Philippine peso and seven other Asian currencies for the last quarter of 2009 and the next four quarters, as rich nations now recognize the urgent need to address global trade imbalances.

The Singapore-based institution, in an October 20 report, now expects the peso to rise as high as 45.60 per dollar before 2009 is over and a steady appreciation over the next 12 months up to 44.00 in the last quarter of next year.

The bank previously projected the peso to trade weaker at 48 this quarter before recovering in 2010 to as high as 46.40 in the last quarter.

DBS has also upgraded its forecasts for the Taiwan dollar, Korean won, Singapore dollar, Malaysian ringgit, Thai baht, Indonesia rupiah and Indian rupee.

The bank also expects China’s yuan to resume appreciation in the second quarter of 2010.

Philip Wee, a DBS currency strategist who wrote the report, said the dollar had depreciated between March and September, while other currencies recovered what they lost during the global crisis.

But the real downward adjustment in the dollar, he said, probably started only last month, when the Group of 20 powerful nations, or G-20, agreed on the need to address global imbalances.

This downward pressure on the dollar “could last for the next few years,” he said.

He also noted waning interest in the dollar as a reserve currency as many countries are moving to diversify their currency reserves, curbing demand for the greenback.

At the G-20 summit held in Pittsburg on September 24 and 25, world leaders agreed that the G-20 replace the G-7 as the leading forum for managing the global economy.

The move, Wee said, “likely heralds a new round of dollar depreciation” to address particularly the huge trade imbalance between the world’s biggest economy, the US, and the emerging economic superpower, China.

“G-7 nations have come to terms with the need for the dollar to depreciate and for Americans to save more,” he said. “What is left is for China and emerging economies with large external surpluses to allow more currency appreciation and encourage their consumers to spend more.”

The current major episode of dollar depreciation, according to Wee, is the third since World War II.

The first episode took place in the 1970s, when the US was running a trade deficit while Germany and Japan had surpluses, he said. The dollar was subsequently devalued against the German and Japanese currencies, and developed nations abandoned fixed exchange rates in favor of flexible exchange-rate regimes.

Wee said the downward adjustment in the dollar was interrupted by the 1973/74 oil crisis that led to a world recession. But after the G-7 was established in mid-’70s, the dollar resumed its slide from 1975 to 1978 to address global imbalances, during which period the greenback fell 35 percent against the German deutschemark and 42 percent against the Japanese yen.

The second episode, Wee said, was targeted mainly at addressing the US-Japan trade imbalance in the last 1980s.

Efforts to address the bilateral US-China trade deficit started at the G-7 meeting in Dubai in September 2003, when China was urged to adopt a flexible exchange rate, he said.

China eventually abolished the yuan-dollar peg in July 2005, with the Chinese currency appreciating for three years thereafter, before authorities adopted a “basically stable” yuan policy from July 2008 as the world reeled from the US housing and credit crisis.

“Owing to upside surprises in the global economic recovery this year, the focus has once again returned to global imbalances,” Wee said. “If the G-20 summit in April 2009 was about achieving recovery, then the summit in September was about ensuring that it is sustained.”

To revive their economies amid the global recession, most countries had adopted fiscal and monetary stimulus measures this year.

With recovery now underway, thanks to the stimulus measures, Wee said cooperation is being sought “for deficit countries like the US to save more and tolerate currency depreciation, and surplus countries like China to consume more and allow more currency appreciation.”

After climbing to a 13-month high of 46.25 per dollar last week, the peso has fallen in what some traders considered as a correction after big gains since hitting 49.01 in early September.

The local unit traded as low as 47.08 on Wednesday, its weakest in almost three weeks, on renewed investor risk aversion due to worse-than-expected US data on housing starts and building permits.

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