WHAT THE BROKER SAYS
Lehman Brothers' strategists say the main beneficiaries of US dollar weakness in the immediate future are the currencies of 'small Asia', in particular the Thai baht.
The US dollar is likely to resume its decline in coming weeks, continuing a trend that began three years ago, but has recently been interrupted in a multi-month reversal.
'As we scan our indicators today, the reality is that there is very little currently standing in the way of renewed dollar weakness,' the broker says in its Global Foreign Exchange and Local Market Strategy report.
In the May 5 report the broker forecasts the baht will strengthen against the dollar from 39.43 to 33 by the end of the year, while the Singaporean dollar will strengthen from 1.64 to 1.45 by year end. The yen is also undervalued and should appreciate from 104.38 to 90 against the dollar by year end, but the rise will be less dramatic owing to the weak business cycle in Japan. Another positive is that policy makers in smaller Asian countries are more tolerant of currency appreciation in view of the growing likelihood of a currency regime change in China.
The Taiwanese and Malaysian currencies should also be counted among the main beneficiaries of yuan revaluation, the broker says.
Adding to the dollar's troubles is a deteriorating US economic outlook. The Lehman team has slashed second-quarter GDP growth forecasts to 3.1 per cent from 3.7 per cent. Growth in the second half is forecast at 3 per cent.
'The dollar pendulum is once again swinging away from the positive temporary impact of Fed policy and back towards the negative long-run drag of a huge and widening current account deficit,' the broker says.
China is expected to revalue its currency by 5 per cent in the second half.
The upcoming European Union referendum in France might weigh on the euro, but the impact of the vote - assuming either outcome - is likely to be temporary.
For the most part, Asian currencies have not appreciated against the dollar since January. 'We believe the present levels still offer a great opportunity for those who want to take a long Asian currency view ahead of a potential Chinese revaluation,' the broker says.