Dollar likely to weather any U.S. recession

By Lucia Mutikani

NEW YORK (Reuters) - A U.S. recession could ironically boost the dollar against the euro and high-yielding currencies as worried investors avoid risk, but much would depend on the depth of the downturn and its impact elsewhere.

This was the view of participants at this week's Reuters Investment Outlook 2008 Summit in New York, who also noted that dollar weakness next year would be mostly versus Asian and some emerging market currencies. These economies, they say, would be forced to allow their currencies to strengthen to beat inflation caused by higher import prices.

A U.S. recession coupled with evidence of global stress could lead to flight-to-quality flows into the dollar.

"If the U.S. goes into recession and it looks like it's going to have a knock-on in other major economies, the dollar may actually outperform in a recessionary environment," said Robert Kowit, an international bond fund manager with Federated Investors.

Analysts reckon that, despite increasing talk of economic de-coupling, the export reliant euro-zone economy would be unable to withstand a recession in the United States and that would put the brakes on the euro, which surged to a record high against the dollar this year.

The euro's rise of over 9 percent against the greenback so far in 2007 already has started to hurt European exports, prompting a growing chorus of complaints from the leaders of France, Germany and Italy.

"It is important to realize that Europe cannot stand much more appreciation in the euro. If we went into recession, Europe would not be far behind, and that would act as a corrective in the currency theme," said Milton Ezrati, senior economist and market strategist at Lord Abbett & Co.

A sharp housing market downturn in the world's largest economy, triggered by loans to homeowners with poor credit histories, has raised the odds of a U.S. recession.  Continued...