London, March 31 (Bloomberg) -- The dollar may extend this year's 4 percent decline against the euro on investors' concerns about the growing U.S. current account deficit and the costs of the war in Iraq, analysts and money managers said. The euro will trade at $1.08 at the end of the second quarter and at $1.10 at the end of December 2003, according to the average forecast of 52 analysts, traders and investors surveyed by Bloomberg News. It was at $1.0868 at 9:30 a.m. in London, after reaching a four-year high of $1.1083 on March 11. ``There's no reason to expect the dollar to go up,'' said Tony Dolphin, who helps run $32 billion at Henderson Global Investors. He holds fewer dollars than recommended by his benchmark and more euros. The dollar may weaken to $1.15 per euro by the end of the year, he said. The dollar's decline means a euro-based investor who bought U.S. Treasuries would have lost 2.7 percent in the past three months, Bloomberg indexes show. A U.S. investor buying German bonds would have made 4.6 percent.
The cost of the Iraq war and rebuilding the country will make U.S. assets and the currency needed to buy them less attractive in coming months, said Dolphin. U.S. President George W. Bush said last week the war is ``far from over.'' Bush asked Congress for $75 billion in extra spending this year to pay for combat costs, humanitarian aid and homeland security. The extra funding will bring the U.S. deficit for the current fiscal year close to a record $400 billion, an administration official said. ``We have an economy that is pushing itself and biting off more than it can chew,'' said Henderson's Dolphin. ``The dollar has further to struggle.''
`More Dependent'
The world's biggest economy needs to bring in about $1.5 billion a day from outside the country to offset the deficit in its current account, the widest measure of international trade, and sustain the dollar's value. When the economy slows, U.S. assets are less attractive to overseas investors. UBS Warburg LLC was the most negative about the performance of the dollar this year, forecasting an increase to $1.20 per euro by the end of the 2003. ``Even if the Iraq war goes well there are still fundamental reasons for dollar weakness,'' said Shahab Jalinoos, a director of foreign-exchange at UBS Warburg. ``The U.S. is likely to become more dependent on foreign capital'' and there's nothing to indicate foreign investors will want to buy more U.S. assets this year, he said. The dollar has plunged almost 25 percent in the past year against the euro, and has fallen about 11 percent versus the yen and the pound.
`Buy Dollars'
Rabobank and Tempus Consulting were the most positive about the U.S. currency this year, predicting the dollar will strengthen to 95 cents per euro by the end of the fourth quarter. ``I'd advise buying dollars now,'' said Lee Ferridge, head of global currency strategy at Rabobank. When the war ends ``we're going to see a pickup in the U.S. economy.'' Demand for investment will increase and that the size of the current account deficit ``is going to be less of an issue'' as the economy improves, he said. U.S. growth slowed to a 1.4 percent annual pace in the fourth quarter, from 4 percent in the prior quarter, figures last week showed. The Federal Reserve's key interest rate is at a four- decade low of 1.25 percent. Haydn Davies, chief economist at Barclays Global Investors, which oversees the equivalent of about $913 billion, doesn't agree. ``We don't want to hold U.S. money-market assets and on top of that, sentiment towards the dollar has weakened considerably.'' Barclays has been selling the U.S. currency in the past year and adding euros, and is now holding more than suggested by its benchmarks.
Stronger Pound
The average forecast for the pound at the end of the second quarter is $1.59, from $1.5765. At the end of the year, the British currency will probably be at $1.60, the survey showed. Henderson's Dolphin said he expects the pound to fall to $1.54 by the end of the year. ``The interest-rate advantage is being eroded and if the U.K. consumer slows down the market will react by pushing the pound lower,'' he said. The Bank of England cut the key rate 25 basis points in February to 3.75 percent, the lowest in 48 years. Another 25 basis- point cut is expected as soon as May, according to the median forecast of 32 analysts surveyed by Bloomberg News on March 21. The yen will probably weaken to 120.24 per dollar by the end of June, from 118.90. By the end of the year, the yen will probably have fallen to 121.21, the survey found. The Japanese currency has gained 0.8 percent against the dollar this quarter, and has lost 3.3 percent against the euro. Still, Barclays' Davies said Barclays holds ``marginally'' more yen than is recommended by its benchmark. The appointment of Toshihiko Fukui, Japan's new central bank governor, has ``boosted our view of the yen,'' he said. Fukui, appointed in March 20, has indicated he supports a weaker yen. He said this month that ``if the currency's move is in tandem with monetary easing, then the central bank will accept it.'' Against a basket of currencies of the U.S.'s six major trading partners, the dollar has fallen 1.3 percent since the start of the year. In the past 12 months, the U.S. currency has shed 15 percent. //www.quote.bloomberg.com