Banks say dollar rally might come to an end next year as economy worsens

The Greenbacks gain is ``increasingly at risk'' toward the year-end as declining credit-market rates switch investors' focus to the slowing economy, according to Bank of America Corp. The dollar has advanced 13 percent against the euro since the collapse of Lehman Brothers Holdings Inc. while the Standard & Poor's 500 index dropped 24 percent. Analysts forecast the U.S. economy will shrink 0.35 percent this quarter after an annualized 0.30 percent contraction in the three months ended September. ``A weak economy and declining stock prices are not a solid foundation for any currency over time,'' Robert Sinche, head of global currency strategy at Bank of America, wrote in a research note dated yesterday. ``Persistent strength'' in the dollar is ``more related to the unwinding of long positions'' in the euro and pound and not a sign of optimism about U.S. economic prospects, he said. The EUR/USD is currently trading at $1.2591 as of 8:30am, GMT.

The JPY fell as U.S. stock futures gained and Asian money-market rates declined, giving investor’s confidence to increase holdings of higher-yielding assets financed in Japan. The yen also dropped against the Australian and New Zealand dollars, two favorites of so-called carry trades, on speculation central bankers will urge more action to stem the global credit crisis. ``U.S. stock futures are gaining, indicating some improvement in risk-taking appetite,'' said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. ``The yen is being sold a bit.'' The USD/JPY is currently trading at 97.85 as of 8:40am, GMT.

The Sterling slumped to a record low against the euro pressured by fears that the recession in the UK will be deeper than in the euro zone and other countries. Weak UK housing and retail sales surveys further fuelled the view that the economy is deteriorating, and investors awaited a quarterly inflation report by the Bank of England on Wednesday which is expected to show that price risks are diminishing as the country falls towards a recession. The GBP/USD is currently trading at $1.5365 as of 9:00am, GMT.

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