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The U.S. exchange rate could get worse before it gets better.

The short-term outlook for the dollar is too volatile to make any concrete prediction, though the long-term outlook is good, said Pierre Legueux, head of currency management for ABN AMRO Asset Management in London.

“If you ask me in one year are we going to trade at $1.20, I’d say, that’s probably unlikely,” he said.

But a better-than-expected report Wednesday from the U.S. Federal Reserve Board, along with more detail about the breakdown in the U.S. subprime housing market, could stave the dollar’s slide against European currencies, said Legueux.

The exchange rate is one factor in determining the cost-of-living allowance of U.S. servicemembers living overseas. When the dollar is weak, troops receive more money in their paycheck to help offset the higher cost of living abroad. Conversely, when the dollar is strong, the COLA goes down.

A year ago, the euro traded at $1.2839, according to data on the Federal Reserve Bank of New York Web site. On Wednesday, the euro sold at $1.3808.

The British pound, meanwhile, sold at $1.908 a year ago according to the Federal Reserve Bank of New York. On Wednesday, it traded at $2.037.

Though the dollar’s drop is likely to slow, its short-term chances for a rebound, Legueux said, might be limited.

It’s possible that the euro could rise to $1.40 or, in a worst-case scenario, maybe $1.45 before it hits bottom, he said.

But dollars are cheap, Legueux said, and over the next two or three years, the U.S. currency should appreciate relative to the euro and pound as investors snap up inexpensive dollars. That means the exchange rate for Americans in Europe who earn U.S. dollars could improve, though not immediately.

From a fundamental standpoint, he said, there’s speculation that the dollar could appreciate even within the next year.

“I think it’s not unrealistic,” he said.

His optimism, however, was tempered.

“I’m not saying the dollar is going to appreciate by 10 or 20 percent,” he said.

Much of the reason for the slide in U.S. dollars has to do with a selloff by China, according to Legueux, a fact that has been overlooked until recently. China has been reinvesting its assets in European currencies, bolstering them as the dollar weakens.

The current strength of the euro and pound is bad for European businesses, Legueux said, because overseas buyers are reluctant to pay the higher prices for foreign goods. “That’s a good way to shoot yourself in your own foot,” he said.

For that reason, there is likely to be pressure in Europe to try to deflate the euro in order to make Europe’s exports more appealing.

When the common European currency was introduced in January 2002, it traded for a little more than 90 U.S. cents, according to Federal Reserve Bank of New York data. At that time, the British pound traded for around $1.44.

ABN AMRO is the eighth-largest international bank in Europe, and 13th in the world, with more than $1.3 trillion in assets.

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