By Robin Chan

FOR the Singapore traveller, making a beeline for the United States for Christmas shopping may make dollars and sense.

The US dollar has already lost 10 per cent since hitting a high of $1.5544 against the Singdollar in March this year, as investors rushed to safe havens amid the global financial crisis.

The dollar weakened a further 1.9 per cent against the Singdollar early last month, falling to a low of $1.3907, the weakest it has been since July last year.

As of last Friday, it had recovered to $1.397 against the local currency.

But for economists and investors, the speedy decline is cause for worry.

They say that this could have major ramifications for the global economy, especially as many key commodities are traded and other transactions carried out in the US dollar.

The weakness in the US dollar has also led some Asian central banks to intervene in the currency markets to keep their currency from rising too high as the economic recovery just begins to take hold.

But predictions of the dollar's death seem to be much exaggerated.

UBS currency strategist Nizam Idris said: 'I think this bout of gradual US dollar weakness should be expected, given the need for global rebalancing. But I do not think this should be read as a dollar crisis just yet.'

He said the dollar has been a victim of the success of policymakers in avoiding an economic abyss, and with market confidence returning, investors are now moving their money away from the safe haven of the US dollar back to riskier assets.

There are other reasons for the dollar's current weakness, notably that countries such as Australia have raised their interest rates, attracting funds from countries such as the US that have lower interest rates. Early last month, Australia became the first of the Group of 20 economies to raise its interest rates.

But OCBC currency strategist Emmanuel Ng believes the longer-term concerns will leave the US dollar vulnerable.

First, because the greenback will continue to be challenged by other currencies such as the euro and the yuan for its role as the global reserve currency.

But there also remain legitimate concerns about the recovery in the US as it crawls out from the depths of the recession, and worries over its ability to finance a trillion-dollar deficit without causing rampant inflation.

The dollar looks to continue down that path for another half year at least, economists say, until the Federal Reserve starts to raise interest rates, an event which is expected to occur in the second half of next year.

'But at the end of the day, the US is still the largest debtor country in the world. The dollar is still used as the medium of exchange and store of value. That's unlikely to change,' Mr Ng said.

As of the end of June, 63 per cent of foreign exchange reserves worldwide were held in the form of US dollars. The next largest was the euro, with 27.5 per cent, according to the International Monetary Fund.

And the alternatives to the greenback are not exactly standing up to be counted. While the euro has the credentials, a recent article in Foreign Policy magazine noted that the European Central Bank does not have the full range of powers enjoyed by the US Federal Reserve and neither does it have an equivalent to the large US government bond market.

Others have touted the yuan, but among its many limitations, it cannot yet be converted freely into other currencies.

'In the medium to long term, we will see an inevitable shift away from the dollar, which has been happening in the last 10 years and more acutely in the last five to seven years,' Mr Ng said.

'But this is by no means a dollar demise right now. Markets don't sense a panic situation, and the dollar is not in any imminent danger of being abandoned. Certainly, China would not like to see that happen, since it is the largest holder of US treasuries,' he said.

Economists expect the dollar to continue gradually trending lower.

HSBC and UOB expect the Singdollar to continue to hover around its current rate and hit $1.40 against the dollar by the end of the year.

Barclays Capital expects the Singdollar to hit $1.38 against the greenback by the end of the year, and predicts that it could go to $1.34 by the end of next year.

This article was first published in The Straits Times.