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SCMP Reporter

WHEN the central banks came out in strong support for the dollar recently, they created awe and perhaps even euphoria in the market.

  The devaluation of the dollar, one of its worst in recent years, was halted, and a rebound was effectively initiated.

  But the future course the dollar will take is far from clear.

  A stronger dollar is more welcome to the international community than a defiant yen, but the turnaround did not herald a Super Dollar.

  During the dollar's worst time, going as low as 79.75 yen in April, there were calls from the territory that a strong dollar would ease some inflationary pressure.

  There would be little impact felt on the equities market, but there was the marginal positive impact to be gained on the front of yen purchases.

  This would be good news for a Hong Kong economy that is now begging for a shot in the arm with the lowering last week of the Government's GDP growth estimates.

  But the market could not be more divided about an imminent cut in the US interest rates.

  Vice-president of Bank of America (capital markets and trading) Eric Nickerson said: 'The next move by interest rates is still going to be up, whereas the general consensus is more like it is going to be down.

  'We haven't given up the higher interest rate potential, we still see that as a risk.

  'I guess we draw attention to it because people aren't thinking about it at all. They don't think there is really a risk out there.

   'We see that as a big surprise.'   Expectation, however, has been building up that the Federal Reserve Board will cut interest rates during or about September, stimulating the US economy and helping the stock market.

   The Americans' attempt to use a weak dollar against a surging yen as a ploy to pry open the Japanese market now seems to be pretty much over.

  Stanley Wong Yuen-fai, treasurer at Standard Chartered, said he was bullish about the dollar.

  A Hong Kong Monetary Authority spokesman said the authority was satisfied with the present strength of the US dollar.

  The authority did a substantial job in defending the Hong Kong dollar against speculative attacks at the beginning of the year, a shrewd move that earned them praise and even more favourable comparison with their counterparts in the US.

   However, Mr Nickerson offered a word of defence for Federal Reserve chairman Alan Greenspan's conservative policy on interest rates.

  He said central banks were committed to bringing down long-term interest rates.

    'They are going back and forth and leaving things quite ambiguous,' he said.

  'They are going to be much more conservative because . . . their ultimate long-term objective is to keep long-term rates down.

  'If you show complacency, the market has always severely punished those countries that have cut short-term interest rates prematurely.'   Mr Nickerson cited Canada as one example, Italy, France and Australia were others.

  From the beginning of September through probably to November would be a vital time for the US administration to do something concrete.

  Dilip Shahani, a strategist with HSBC Markets, said inflation was not going to improve much because of the slight turnaround in the US dollar.

    Food prices in particular would not be affected unless there was a major appreciation of the dollar against the yuan.

   Hong Kong gets its food predominantly from China.

  'Remember the Hong Kong dollar is pegged at $7.8 (to one US dollar) and at the moment it's $7.74.

  'It's like no change at all,' he said.

  Mr Shahani said the reason for the recent upturn in the dollar was commitment by Japan, the US and Germany.

  He expected the dollar to try the level of 1.55-1.60 deutschemarks and 105-110 yen in a year.

  Japan's second supplementary financial package of several-trillion yen to be spent on infrastructure, and the government's determination to remedy the problem of bad debts in the banking system would help.

   These two commitments were 'in the process of being put on paper,' Mr Shahani said.

   They would lead to a reduction of the trade imbalance that had been a thorny issue between the Japanese and the US.

  Meanwhile, the US administration is to announce in two to three months a commitment to reduce the federal budget deficit from US$160 billion to zero within seven to 10 years.

     Mr Shahani believed the present Congress was more willing to carry out its stated intentions than previous ones. Mr Nickerson, however, had reservations about how the balance budget could be improved.

   For him, there was little more than 'a lingering hope that something will come out of the balanced budget'.

  If nothing much came of the proposed budget cuts, he predicted, there would be another nosedive by the dollar.

  Talks between the US and Japan on sales of cars and car parts lifted morale earlier this year, but the few good signs were only psychological, Mr Nickerson said.

  He believed that any change in the currency scene would depend on the outflow of capital from Japan.

  The cut in German interest rates on Thursday, which triggered cuts across Europe, made those markets attractive, and any flow of Japanese capital would quite likely be in that direction.

  However, the course the dollar had taken was one that defied fundamentals, Mr Nickerson said.

   In a historical perspective, it was still pretty weak and people had legitimate doubts whether it would ever regain power.

  'Maybe over a 10-to 15-year period one might be able to construct a scenario where the dollar goes back, assuming the US actually begins to cut its budget deficit and it begins to narrow its current account deficit.

  'I don't think you'll find many analysts that have very sharp declines of either one of these variables over the next two years,' Mr Nickerson said.

  As Mr Wong recalled, about two decades ago 60 per cent of world trade was priced in the dollar.

   Now it had shrunk to only 20 per cent.

   The US then accounted for about 40 per cent of world exports, now it accounted for 14 per cent.



Dollar remains shrouded in doubt and debt