Singapore, May 5 (Bloomberg) -- Investors and traders are likely to drive the dollar lower against the euro for a fifth week as evidence mounts that the world's largest economy is waning. Two-thirds of the 34 traders, investors and analysts polled by Bloomberg News on Friday recommended selling the U.S. currency for euros. An unemployment rate tied at an eight-year high and a contraction in manufacturing damped optimism that growth would accelerate quickly following the war in Iraq. The conflict prompted some investors to put their money in assets abroad. ``The weakness in the dollar reflects the continuing uncertainty about whether the U.S. is going to get traction in its expansion during the second half of the year,'' said Former Federal Reserve Governor Laurence Meyer, an analyst at the Center for Strategic and International Studies, a non-partisan research group in Washington. The dollar traded at $1.1225 against the euro at 7:30 a.m. in Singapore, after sliding 1.7 percent last week and declining against 15 of 16 major currencies. It gained 3.7 percent against the South African rand. The U.S. currency bought 119.05 yen, having fallen 1 percent against Japan's currency last week.
Demand for dollars dropped after an industry report showed U.S. manufacturing contracted last month by the most since October 2001. Companies cut payrolls in April for a third consecutive month, and the unemployment rate jumped to 6 percent, the Labor Department reported Friday. ``The focus is on conditions in the U.S.,'' which has already led ``investors to shift to the euro zone,'' said Shigehiro Kamimura, manager of the market trading department at Resona Bank Ltd. in Tokyo. The dollar is down 6.5 percent against the euro this year and reached a four-year low of $1.1284 per euro last week. Still, that level is above the dollar's average exchange rate against the euro and the region's former benchmark, the German mark, over the past 15 years. This suggests the dollar may extend its losses, according to HSBC Securities USA Inc.
$1.20 Forecast
``Since we have been in a trend of dollar weakness, the market will look for signs on whether that trend will'' continue, said Sudesh Mariappa, who manages $28 billion in global assets at Pacific Investment Management Co. in Newport, California. He expects the dollar to trade as low as $1.20 per euro by yearend. Central bankers in the U.S. and Europe meet this week on interest-rate policy. The Federal Reserve has left its benchmark rate target at a 41-year low of 1.25 percent since November and is expected to keep it there at a meeting tomorrow, a Bloomberg News survey showed. The European Central Bank's 2.5 percent lending rate is also likely to be left unchanged on May 8. ``The drop in the dollar's value ``shifts some of the burden of the weakness of the global economy elsewhere,'' said former Fed Governor Meyer. ``If it falls very shortly, it could be a reflection of the change in willingness of foreigners to absorb the large flow of the dollar.''
'Looking for Yield'
The low U.S. rate, together with an anemic growth pace, has already heightened speculation the U.S. may not be able to attract the necessary $1.5 billion a day in global capital to offset a record current account gap. The most active 10-year Treasury note yields 3.92 percent, 16 basis points less than the 10-year German bund. Investors ``are looking for yield,'' said John McCarthy, a director of currency trading at ING Financial Markets LLC. They ``are going into those currencies where their yield differentials are favorable.'' A dollar-based investor buying a Bloomberg index of European government bonds maturing in more than a year would have received a 9.3 percent return year-to-date, compared with a 1.7 percent return on U.S. bonds of similar maturities. A euro-denominated investor buying U.S. bonds maturing in more than a year would have lost 5 percent. ``If you have historically low interest rates and a huge current account deficit, it's difficult to imagine your currency will fly,'' said Louis Pestel, who oversees about 2 billion euros in bonds at Lazard Freres Gestion in Paris.
Japanese Yen
Twenty-seven percent of those surveyed recommended buying the Japanese yen against the dollar, the survey found, while almost 40 percent said they would hold yen. Merrill Lynch & Co., the biggest securities firm by capital, increased its weighting of the dollar and yen in its model currency portfolio. The firm, which had suggested an allocation to dollars 14.5 percentage points lower than the benchmark weighting, now recommends trailing the benchmark by 13.9 percentage points. Yen holdings should exceed the benchmark weighting by 2.2 percentage points, up from 0.6 percentage point, Merrill said in a report Friday. ``The dollar's decline may be limited against the yen because of concern Japan may sell'' its currency to boost growth in the country, said Resona Bank's Kamimura. //www.bloomberg.com