Economists fear poor corporate conduct will dull investor confidence, writes Conor O'Clery, in New York

The slump in the value of the dollar, combined with a fall in investor confidence in the United States caused by mounting corporate scandals, could see investment flowing out to the European and Asian markets, according to US economists and analysts.

The dollar fell to a 17-month low against the euro this week, due in part to concerns that the US economic recovery is losing strength. These fears were heightened by a Federal Reserve report on Thursday that shows the US economy is growing only in fits and starts, and by a report by the National Bureau of Economic Research that it was not yet ready to declare the recession that began in March - by its own complex calculations - was officially over.

Global investment out of the United States has not, up to now, brought great rewards to US investors, largely because of the strength of the dollar, said Mr Denis Curran, international president of Bank of Ireland Asset Management in Greenwich, Connecticut.

However, "with the US dollar weakening, there is every chance that US investors will warm to global investing", he said.

"There is also a general view that US stocks are much more fully priced than European or Asian stocks. This will mean a greater warmth towards global investing."

Bank of Ireland Asset Management manages investments abroad for US investors.

Despite the decline in the major Wall Street indices, US stocks remain high by historical standards. The Standard & Poor's index of 500 popularly traded stocks has fallen by 20 per cent since March 2000 but the price/earnings ratio is still as high as 29, almost twice the normal 16.

The fall in investor confidence has prompted some big pension funds in the United States, including New York (with $112 billion (€118.6 billion) under management) and North Carolina, to warn that they will take their business away from Wall Street unless changes are made by the big investment houses to reduce potential conflicts of interest involving stock-research analysts.

Whether European or Asian markets will prove more attractive to such state investors is not clear however. But, if the changes they require are not brought about, they could in future look to diversify in different markets.

The extent of the fall in investor confidence in the United States was revealed in a Wall Street Journal/NBC poll published on Thursday.

It showed that 57 per cent of Americans do not trust corporate executives or brokerage firms to give them honest information.

Some sectors are rated lower than others. Fifty-four per cent of Americans hold a negative view of pharmaceutical companies, according to the survey, which was conducted before the arrest on Wednesday of Mr Samuel Waksal, the former chief executive of the biotechnology company ImClone, on charges of insider stock trading.

One in three people said they believed that what went on in Enron was common in boardrooms across the country.

Three out of four Americans also believe that petrol and natural gas price fluctuations are the result of manipulations by energy companies, which rank even lower in the public esteem than pharmaceutical companies. The accounting scandals, the conflicting advice of Wall Street analysts and the highly publicised lapses of corporate icons all contributed to the heavy toll on investor confidence in the United States. The list of big companies under investigation - Kmart, Global Crossing, Qwest, Adelphia, Dynegy - reads like the 2001 portfolio of a solid investment trust fund.

Economists fear the damage to investor psychology is so serious it could severely retard the economic recovery. "I don't think there's much more that can undermine investor confidence than conduct like this," said Ms Helene Glotzer of the Securities and Exchange Commission (SEC), referring to the ImClone affair.

Mr Waksal, a fixture of Manhattan social life, is the latest US chief executive to fall from grace. Last year, ImClone was the hottest biotechnology stock and its colon cancer drug Erbitox was expected to get quick approval and produce sales of $1.5 billion within three years.

Instead, ImClone's shares plummeted in December when an unfavourable regulatory ruling was issued.

The complaint against Mr Waksal is that he tipped off his father and daughter to sell hundreds of millions of dollars worth of shares days before the news was made public.

His arrest follows on the downfall the previous week of Dennis Kozlowski, former chairman of Tyco, on charges of the misuse of company money.

Mr Peter Hart, one of the pollsters who conducted the survey, said: "The public has come to a single point of view. You haven't levelled with us and you are not dealing fairly with us."

The mood among investors has sunk to the point it reached in the days after September 11th, according to UBS and Gallup, which surveys investor optimism every month.

Wall Street institutions are facing a flight of investor cash from the markets.

Charles Schwab has seen its average daily trading volume fall by more than 50 per cent from two years ago.

Goldman Sachs chairman and chief executive Mr Hank Paulson warned last week of a crisis of confidence in the way companies do business.

"In my lifetime, American business has never been under such scrutiny and, to be blunt, much of it is deserved," he told the Washington press club.