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Soft landing of U.S. economy could support dollar, according to Thomson Research Wanfeng Zhou NEW YORK (Thomson Financial) - The dollar has been in a free fall lately. Just how low can it go? A soft landing for the U.S. economy could be the best-case scenario for the greenback, according to a recent report from Thomson research. In contrast, a deepening of subprime-fed credit quality contagion risks in the U.S. financial markets could cause a lot more damage to the greenback.
Since the start of 2002, the Dollar Index, which tracks the U.S. currency against a basket of the world's major currencies, has declined about 35%. Against European currencies, the dollar has fared much worse. The euro has risen by about 68% from $0.8592 at the beginning of 2002 to $1.4473 at the end of October 2007. The shared, 13-nation currency touched an all-time high of $1.4966 on Nov. 23. 'At the current rate of dollar depreciation, it seemingly would not take as long for the euro to rise another 38% to two dollars per euro,' said Mike Thompson, managing director of global research at Thomson Financial. The Lab Thomson report studied a variety of market-driven factors that have led to dollar weakness in recent years as well as the prospect that these forces will abate in 2008. Considering current Wall Street projections for a 2% to 3% federal funds target rate in the next year or so, the interest rate differential between the German 2-year Bund (Europe's government security) and the U.S. 2-Year Treasury note should continue to favor the euro over the U.S. dollar, Thompson said. Fed easing would hurt the U.S. dollar as lower interest rates make dollar-denominated currencies less attractive to foreign investors. The euro also tends to rise in value when Europe's stock market outperforms the U.S., Thompson said.
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