DOLLAR ON THE UPSWING AT YEAR-END
ANDREY PRUMOV, FINANCIAL ANALYST, TO THE BANKER WEEKLY:Mr. Prumov, how do you expect the dollar/euro rate to move? Will the US currency live another year of slide against the euro?- I think that this is a transitional period. The present moment is the final stage of a three-year slide of the dollar not just against the European currency, but in a global scale. And it is also the beginning of the dollar's future rise.Nevertheless, the US government tolerated the decline of the dollar. And indeed the dollar fell cheaper by over 40% against the euro in the past three years. Why do you think the euro was most burdened by the devaluation of the US currency?- Because the Asian economies such as Japan, China, etc., which are the main exporters to the USA, manage their currencies and profit by their slide. Japan intervenes on the forex markets incessantly, and China keeps the yuan fixed. This is exactly what is about to change.First, China is put under international pressure to reassess its currency and introduce a floating rate in the near future. Of course, that will only happen when the country itself finds it is good for it. At the same time, the Japanese economy is already strong enough to afford a strong currency.So the US dollar will keep sliding, but not against the euro. In this aspect it already reached its lowest levels and I think that a period of rise will follow. If the rate is about USD1.31 per euro now, it may well become USD1.20-1.25 per euro at the end of 2005.But this is just a scenario. It is too early to make explicit forecasts, as a few important events are still to take place...You probably mean the official assumption of President Bush's second mandate?- At the start of his second mandate George Bush will indicate the main political directions in the management of the budget. The main problem of both the USA and the dollar from a fiscal point of view is the double deficit - the current account deficit and the deficit of the Federal Budget. President Bush promises that this deficit will be cut twice in five years. The intention is serious, yet it has to be supported by respective legislation. This is what Bill Clinton did. He cut the deficit to zero and the US currency went up to DEM2.20 per dollar.The second important event will be the G7 meeting in February in which China will take part. There are indications that this time more specific issues will be discussed. With this meeting coming closer, cross rates have become quite dynamic since January 1. Dealers comment that there is comparatively low risk in selling euro and buying yens. That is why we see the euro falling cheap. The reason is that in terms of cross rates trading often passes through the dollar as a major currency. Direct euro-yen transactions happen rarely. Usually they are made in the order euro-dollar-yen. This also helps the dollar rise against the euro.When we talk about the dollar/euro rate, we should never forget two things. First of all, the dollar is a world's main reserve currency which means that about 80% of the world reserves are kept in dollars.So you are firm that the US currency is going to rise?- Yes, I think that the dollar will be on the upswing by the end of the year. However, there were similar forecasts in 2004. My colleagues who occupy with the international forex markets now complain that they have not made a profit last year. It's hard to guess how long an administration will keep its willingness to devaluate the local currency. As to the USA, this forecast is almost impossible.In your opinion, are the Bulgarian budget and economy prepared for a change in the dollar/euro rate?- The budget calculations have been made at a 1.66 dollar rate which means that currently the fisc is generating a surplus because of the exchange differences.At the same time I think that Bulgaria's economy will keep generating deficit for many years and that deficit will be covered by investments. Therefore, it is good for us to keep the lev stable and tending to get strong. This is favourable for those who export to the EU countries and they are the most numerous group.For us, it is of equal danger to have a very strong dollar or a very strong euro. The same is also valid for a very weak dollar or a very weak euro.