Dollar Decline Won’t Evolve Into a Crisis, Bank of America Says

Oct. 13 (Bloomberg) -- The dollar’s decline won’t turn into a crisis because of calls by central bankers for strength in the currency, the lack of a wholesale shift in reserve holdings and the absence of inflation, according to Bank of America Corp.

“We find the suggestion of an impending U.S. dollar crisis caused by a run-up in inflation or a sudden shift away from the dollar as the global reserve currency unconvincing,” John Shin, a strategist in New York at Bank of America Merrill Lynch, wrote today in a note. “We believe the growing chorus of voices calling for dollar strength is an important part of the end-game for dollar weakness within G-10.”

The dollar declined today to the weakest level against the euro since before the bankruptcy of Lehman Brothers Holdings Inc. The U.S. currency fell as much as 0.7 percent to $1.4876 per euro, the lowest since Aug. 22, 2008. Shin forecasts that the dollar may weaken to $1.50 against the euro by year-end.

The Federal Reserve’s asset purchase programs to unclog the credit markets won’t weigh down the dollar, Shin wrote. “In fact, the opposite is more likely as the Fed starts to drain liquidity in 2010 in preparation for eventual rate hikes.”

The U.S. central bank has bought $297 billion in U.S. debt under a plan to purchase as much as $300 billion of Treasuries that is set to expire this month.

Increasing concern over the dollar’s role as the global reserve currency won’t be the greenback’s downfall either because there aren’t any “genuine competitors,” Shin wrote.

European Central Bank President Jean-Claude Trichet said Oct. 8 that a strong dollar is “important,” repeating previous remarks. Toyoo Gyohten, an adviser to Japan’s new finance minister, said the same day there is “no better alternative to the dollar.” Bank Rossii First Deputy Chairman Alexei Ulyukayev said Sept. 29 that Russia will keep buying Treasuries because there’s no realistic alternative.