Dollar's decline will continue in 2005, currency experts predict
January 23, 2005
NAVAL STATION ROTA, Spain — You might want to buy your euros now, currency experts say.
The dollar could be in for a bigger slide in 2005.
Americans living overseas watched the dollar fall lower and lower against the euro last year, boosting the costs for those living off base.
But the trend has to bottom out, right? Not any time soon, analysts say.
Some exchange experts forecast that the euro will reach $1.45 in the next several months, but a worst-case, “nightmare” scenario has the dollar plummeting to $2 within a year.
David Gilmore, a partner with Foreign Exchange Analytics in Essex, Conn., sees the dollar dropping to $1.45 against the euro.
“I think we’ll see new lows before the year is out,” he said. “It’s hard to say when. You know, nothing is ever a straight line.”
The weakening dollar can make it difficult financially for Americans living overseas, but the Pentagon has allowances set up so servicemembers and commands can maintain their purchasing power.
American servicemembers stationed in Europe would likely see a boost in their cost-of-living allowance, while the different military services stationed in Europe have special service-level accounts that they can grab from to buffer the fluctuating currency rates. For example, if the dollar drops, U.S. Air Forces in Europe can tap into an Air Force budget set up specifically to help minimize the impact, command spokesman Capt. Chris Watts said.
The dollar has rebounded in the last several weeks to $1.31 on Tuesday, but analysts said that the spike in the value would not last.
“I think it’s temporary,” Gilmore said. “The Bush administration has made deficit reduction a key objective of the new term, and it’s ability to achieve that will probably determine what happens to the dollar.
“I just think there’s a very poor record in Congress for cutting discretionary spending for obvious reasons. The war on terror has escalating costs to it. And homeland security has escalating costs to it. And we have record tax cuts in the pipeline the Bush administration is intent on making permanent. So, the budget math doesn’t add up.”
Clifford Bennett, a chief strategist based in Sydney, Australia, with FxMAX, said the dollar is in a “historical long-term re-pricing.”
“The rally of the U.S. dollar went on for years, and we’re just now seeing that unwound,” Bennett said. “And things have really changed where the rest of the world wants to invest in the rest of the world instead of just the U.S. this decade.”
The good thing is that currency rates are cyclical. What goes down, Gilmore said, will likely come up. The question is, when?
“If you’re a member of the U.S. military and you’re living in Germany or somewhere else in Europe, right now you understand very much what it does to your purchasing power and you stay on base,” Gilmore said. “But it won’t stay there forever. The dollar will strengthen over time.”
For Americans living overseas, take heed: Even the currency experts get it wrong sometimes.
“Forecasting currencies is more art than science,” Gilmore said. “There’s no Holy Grail for doing it accurately. Anyone that says they can, his or her nose is growing as they’re telling you that.”