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					                                                                                Dollar
       March 1, 2005
                       0   Economic Research




                           Greenback Treading Water
BMO Nesbitt Burns          The U.S. dollar has temporarily stabilized after broad weakness in February eroded some
      Economics            of the gains made earlier in the year. The main downside risk to the US$ remains the
     1•800•613•0205        sheer size and the resiliency of the current account deficit (5.6% of GDP in Q3). Not that
                           the U.S. has had any trouble financing the shortfall: Foreign private investors have
                           recently shown a very strong demand for U.S. corporate bonds and agency debt, even as
                           foreign central banks’ enthusiasm for Treasuries has cooled. While the US$ buckled
                           following reports that South Korea looks to diversify its FX reserves, the currency soon
                           stabilized. Such a development would have been a clear downside risk to the greenback
                           a few months ago. Capital flow developments will be an ongoing source of volatility, but
                           interest rates will help backstop the greenback through the first half of the year. The Fed
                           is resolved to tighten amid growing signs that inflation is creeping up. As well, the 10-year
                           Treasury note now carries a yield of over 4.35%, well above the sub-4% rate hit early in
                           the month, and narrowing the spread with comparable securities. The near-term growth
                           outlook also favours the U.S., particularly compared with the sluggish euro-zone.
                           However, the US$ will lose momentum through the second half as other central banks
                           start to raise rates, with the U.K. and Australia setting the stage for tightening moves.

                           The Canadian dollar has partially recovered from the initial bout of selling pressure in the
                           wake of this year’s Federal Budget, which unveiled the surprise removal of the 30%
                           foreign content limit on pension funds. The scrapping of the cap may take some steam
                           out of the Canadian dollar over the medium term, but we have not significantly altered
                           our call on the currency over the next year. While there may be some expectation that
                           capital outflows will ramp up, the reality is likely to be much more subdued, with the U.S.
                           dollar still widely viewed as vulnerable to further downward correction. Meantime,
                           commodity prices continue to cook, attracting robust inflows into Canada. For instance,
                           2004 saw portfolio capital inflows of $53.2 billion into Canada compared with a mere
                           $16.2 billion outflow from domestic investors. Finally, Ottawa has hinted that they are




                                                                                              C
                                                                                              B
                           reviewing foreign ownership restrictions in a number of key industries, which could
                           eventually trigger another wave of capital inflows, broadly offsetting outflows resulting
                           from the foreign content limit change. Against this backdrop, we continue to look for a
                           second-half rebound in the loonie.



                           1 • Dollar Scenario                                                                             ™
                                                                                                                           ®
Currency                                                                                              Actual                                                     2005                                                                      2006
                                                                                                      28-Feb                     March                       June September December                                                       March
Forecasts                                              CANADA                                            1.23                      1.24                       1.25                       1.23                     1.21                        1.20
versus                                                   (US$/C$)                                      (0.811)                    (0.805)                   (0.800)                    (0.815)                   (0.825)                    (0.831)
U.S. Dollar                                            EUROPE
                                                       Euro *                                             1.32                      1.32                       1.29                      1.33                       1.35                      1.37
                                                       Denmark                                            5.62                      5.65                       5.75                      5.60                       5.50                      5.40
                                                       Norway                                             6.21                      6.25                       6.30                      6.20                       6.15                      6.10
                                                       Sweden                                             6.84                      6.85                       6.95                      6.80                       6.70                      6.60
                                                       Switzerland                                        1.16                      1.17                       1.18                      1.15                       1.14                      1.12
                                                       United Kingdom *                                   1.92                      1.92                       1.88                      1.93                       1.95                      1.95
                                                       MIDDLE EAST/AFRICA
                                                       Saudi Arabia      3.75                                                       3.75                       3.75                      3.75                       3.75                      3.75
                                                       South Africa      5.83                                                       5.95                       5.90                      5.80                       5.75                      5.65
                                                       ASIA
                                                       China                                             8.28                      8.28                        8.28                      7.50                      7.50                       7.50
                                                       Hong Kong                                         7.80                      7.75                        7.75                      7.75                      7.75                       7.75
                                                       India                                             43.6                      43.5                        43.0                      42.5                      42.5                       42.0
                                                       Indonesia                                         9268                      9,200                      9,200                     9,175                      9,170                     9,200
                                                       Japan                                              105                       104                        102                       101                        100                        99
                                                       Korea                                             1005                      1,010                      1,005                     1,000                       990                       985
                                                       Malaysia                                          3.80                      3.80                        3.80                      3.80                      3.80                       3.80
                                                       Philippines                                       54.7                      55.0                        56.5                      56.5                      57.0                       55.5
                                                       Singapore                                         1.62                      1.63                        1.61                      1.60                      1.60                       1.59
                                                       Taiwan                                            31.1                      31.0                        30.5                      30.0                      30.0                       29.5
                                                       Thailand                                          38.2                      38.5                        38.0                      38.0                      38.5                       39.0
                                                       SOUTH PACIFIC
                                                       Australia *                                       0.792                     0.790                      0.795                     0.800                      0.810                     0.790
                                                       New Zealand *                                     0.727                     0.720                      0.725                     0.730                      0.725                     0.720
                                                       LATIN AMERICA
                                                       Argentina                                          2.94                     3.00                        3.05                      3.00                      2.95                       2.90
                                                       Brazil                                             2.59                     2.55                        2.60                      2.65                      2.70                       2.65
                                                       Chile                                              575                       590                        585                       580                        570                       570
                                                       Colombia                                          2329                      2,360                      2,350                     2,340                      2,360                     2,370
                                                       Mexico                                            11.10                     11.05                      11.00                     11.15                      11.20                     11.30
                                                       Venezuela                                         1919                      1,920                      1,920                     2,000                      2,000                     2,000
                                                       * U.S. dollars per foreign currency

Cross Rates                                            VERSUS CANADIAN DOLLAR
                                                       Euro (C$/€)            1.63                                                 1.64                        1.61                      1.63                      1.64                       1.65
                                                       United Kingdom (C$/£)  2.37                                                 2.38                        2.35                      2.37                      2.36                       2.35
                                                       Australia (C$/A$)     0.977                                                 0.981                      0.994                     0.982                      0.982                     0.950
                                                       Japan (¥/C$)            85                                                    84                         82                        82                         83                        82
                                                       Mexico (Peso/C$)       9.00                                                 8.90                        8.80                      9.09                      9.24                       9.39
                                                       VERSUS EURO
                                                       United Kingdom (£/€)                               0.69                      0.69                       0.69                      0.69                       0.69                      0.70
                                                       Japan (¥/€)                                        138                       137                        132                       134                        135                       136




                                                                                                                                                                                                     b
The opinions, estimates and projections contained herein are those of BMO Nesbitt Burns Inc. (“BMO NBI”) as of the date hereof and are subject to change without notice. BMO NBI makes every effort to ensure that the contents herein have
been compiled or derived from sources believed reliable and contain information and opinions, which are accurate and complete. However, BMO NBI makes no representation or warranty, express or implied, in respect thereof, takes no
responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Information may be available to BMO NBI, which is not
reflected herein. This report is not to be construed as, an offer to sell or solicitation for or an offer to buy, any securities. BMO NBI, its affiliates and/or their respective officers, directors or employees may from time to time acquire, hold or sell
securities mentioned herein as principal or agent. BMO NBI may act as financial advisor and/or underwriter for certain of the corporations mentioned herein and may receive remuneration for same. BMO NBI is a wholly owned subsidiary of
BMO Nesbitt Burns Corporation Limited, which is a majority-owned subsidiary of Bank of Montreal. To U.S. Residents: BMO Nesbitt Burns Corp. and/or BMO Nesbitt Burns Securities Ltd., affiliates of BMO Nesbitt Burns Inc., accept responsibility for
the contents herein, subject to the terms as set out above. Any U.S. person wishing to effect transactions in any security discussed herein should do so through BMO Nesbitt Burns Corp. and/or BMO Nesbitt Burns Securities Ltd. To U.K. Residents:
The contents hereof are intended solely for the use of, and may only be issued or passed on to, persons described in Part VI of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001.

® “BMO” is a registered trademark of Bank of Montreal, used under licence. “Nesbitt Burns” is a registered trademark of BMO Nesbitt Burns Corporation Limited, used under licence.




                                                     2 • Dollar Scenario

				
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