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New York: The dollar will stage a gradual recovery in the second half of the year and into 2009, but the growing influence and economic clout of the developing world mean it will probably never regain its past dominance.
Participants at last week's Reuters Investment Outlook Summit said the rise of China, Brazil, Middle East oil exporters, and others as economic heavyweights is shifting the balance of power away from US consumers - once the engine of global growth.
Increased demand from these giants has been a major driver of inflation, pushing oil prices to all-time highs and making imports costlier for US consumers.
"The emerging world is not just a source of supply but also a source of demand," said Robert Sinche, head of strategy for currencies, global rates and commodities at Bank of America.
That has contributed to a five-year dollar decline that's accelerated of late amid a deep US housing slump and a credit crunch that began last year with a wave of defaults on risky US mortgages.
The euro, which bought $1.18 in 2006, sprinted above $1.60 this year, the highest level since its 1999 launch. And while summit participants expect the euro to retreat below $1.50 in the next six months or so, few were big dollar bulls.
"I think we all have to get used to a lower-based dollar going forward," said Firas Askari, head of currency trading at BMO Capital Markets.
"I'm not saying it won't be the world's reserve currency anymore - it probably will be for the next 10-15 years - but I think the US consumer, who has been the real source of dollar strength by being the consumer [of last resort] for all products made globally, I think that's going to change."
Weaker greenback
In fact, with wealth likely to be distributed more evenly across the globe in the years ahead, the US will need a weaker dollar if its exporters want to sell their wares to the multitudes of increasingly wealthy Asian consumers.
"The reality is that the US still has an enormous trade deficit, and the only thing that is going to shrink it over time is a more competitive dollar," said Martin Feldstein, head of the National Bureau of Economic Research.
A weaker dollar helped narrow the US current account deficit in 2007 for the first time in six years, and many economists credit the rise in exports with being the main crutch supporting the US economy.
High inflation hasn't only been bad news for the dollar. Roger Kubarych, chief US economist at The Unicredit Group, said investors have shied away from foreign exchange altogether.
"It hasn't just been that they've gotten out of the dollar. They've gotten out of all currencies and into all commodities," he said.
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