Mighty greenback expected to feel the pressure well into 2005

CURRENCY traders on both sides of the Atlantic were agreed yesterday - the US current account and budget deficits will continue to undermine the ailing dollar well into this year.

Although trading volumes had all but dried up, the euro still held near-record highs against the greenback and the yen, as analysts remained confident of continued dollar weakening in 2005.

Having broken above $1.366 in late morning trade, the euro settled at around $1.365 by the time most European traders had given up for the year - up from $1.363 at the close of trade on Thursday, when the single currency hit its sixth-consecutive record high at $1.3667.

Structural imbalances in the US economy and slower-than-expected growth in jobs creation have driven the dollar lower against all the major currencies this year. Against the euro, the greenback has fallen around 8 per cent, and 4.5 per cent against the yen.

Sterling has gained more than 8 per cent, the South African rand 19 per cent, the Korean won 15 per cent and the Norwegian krone about 10 per cent.

"For next year, our central view is that the dollar follows a similar path as it did in 2004," wrote Royal Bank of Scotland currency strategists in a research note.

Darah Maher, strategist at Calyon, added: "The retreat in the dollar is being cited as a harbinger of things to come in 2005 - the consensus is firmly expecting further weakness."

Figures showed that being long of euros this year - betting the currency will rise - against the dollar yielded a return of around 8 per cent in 2004.

Investors’ major concern is whether the US can continue to attract enough foreign capital to plug its current account deficit, which is now running at 5.6 per cent of gross domestic product. Without adequate inflows, the current account deficit is a natural drain on the greenback.

The negative sentiment for the dollar has been exacerbated by expectations that the world’s economic powers are not likely to combine forces yet to stem the currency’s decline.

But dollar weakness also means painful readjustment for Europe, which faces a competitive disadvantage against the US and much of Asia where many currencies are pegged to the dollar.

Therefore, investors will keenly look towards February’s meeting of top officials from the Group of Seven industrialised nations in London for clues as to whether the hands-off currency policy approach will continue in 2005.