The $

["Ian Murray" <seamus2001@xxxxxxxx>]

Dollar needs a soft landing, say economists

Special report: global recession

Charlotte Denny and Heather Stewart
Monday August 20, 2001
The Guardian

Central banks must intervene to steady the dollar's decline against
other currencies to prevent a meltdown that could threaten the global
economy, two leading City economists warn today.

The greenback has lost more than 10% of its value against the euro
over the last two weeks and is expected to come under new pressure
when markets open this morning.

Stephen King and Peter Oppenheimer at HSBC Global markets say that,
while a modest decline in the dollar against the euro could be good
for Europe and the United States, the currency must not be allowed to
weaken against the yen, because that would pile more pressure on the
recession-hit Japanese economy.

If the dollar collapsed: "It would be bad for Europe and disastrous
for Japan," they say. "The Japanese economy would be dragged further
into a deflationary spiral resulting in a renewed profit collapse."

With the Federal Reserve is expected to cut US interest rates this
week for the 7th time this year as concerns continue about the
possible depth of America's economic slump, the research calls for a
"radical" commitment from G7 nations to target a "managed decline" in
the dollar, intervening to bring it about if necessary.

A gradual depreciation would help hard-pressed US manufacturers, who
have been voicing concern about the effects of Washington's strong
dollar policy on their competitiveness. But concerted action by world
governments will be needed to protect the world economy from the
dangers of a "disorderly" fall.

To prevent a meltdown, HSBC says the Japanese authorities must cut
their borrowing so that Japanese savers are forced to look abroad for
investment opportunities.

Washington and Tokyo must be prepared to step into the markets to cap
the yen's rise, and perhaps to maintain the euro's appreciation
against the dollar.

The European Central Bank would have to cut interest rates
"aggressively" in this scenario, stimulating European consumer demand
to keep the single currency buoyant and cushion the global economy
from slowdown by making euroland a "consumer of last resort." ECB
policy makers have been criticised for cutting rates only once this
year in the face of global slowdown.