Dollar Gets No Respect, Hits Record Lows
Tuesday December 2, 3:40 pm ET
By Daniel Bases
NEW YORK (Reuters) - The dollar hit a record low versus the euro on Tuesday in a broad sell-off as investors ignored a U.S. economic upswing and instead went along with the dominant dollar downtrend.
Tuesday's strong November auto sales data and Monday's factory report showing the fastest pace of growth in 20 years would normally benefit the dollar. But investors have been forced to either join the dollar sell-off or get out its way.
"People try to put a reason behind this sell-off, citing steel tariffs or trade protectionism, but the truth is the United States has a huge trade deficit but does not have high enough interest rates to attract enough capital here to finance it," said Mike King, trader at Commerzbank in New York.
"Dollar weakness is just the way of things, and people need to sell dollars which, in a thin holiday market, makes the moves one way and very violent," he said.
Interest rates in the United States stand at a 45-year low of 1.00 percent and are not expected to rise anytime soon. With rates in the euro zone at 2 percent; in Britain at 3.75 percent; in Canada at 2.75 percent; and in Australia at 5 percent, the dollar is less attractive for foreign investors to purchase.
The euro surged to a fresh record high for the third day straight, touching $1.2091(EUR=) according to Reuters data, and measured a 1 percent gain on the day. Traders see the next resistance level for the surging euro in the $1.2125 area.
In the last month, the U.S. financial markets have seen an outflow of foreign capital that is highly correlated to the decline in the dollar.
According to the Bank of New York's portfolio flow monitor, a tool used to predict the direction of currencies, a net $2.3 billion in cash from both equities and fixed income exited the United States, while the euro zone has seen non-European investors plug 1.6 billion euros into the region's stock and bond markets.
"We would have expected the U.S. equity markets to rally with such strong economic data and corporate earnings. On the fixed income side there is disappointment. Foreigners are not investing in U.S. fixed income because of interest rate differentials," said Michael Woolfolk, currency strategist at Bank of New York.
On Tuesday, Sterling hit a five-year high against the dollar for the fifth straight session, reaching $1.7309(GBP=) according to Reuters data, a gain of roughly 0.75 percent on the day. If sterling hits the $1.7350 area, it will be its strongest point since busting out of the ERM 10 years ago.
The dollar fell to a near two-week low against the yen of 108.60(JPY=), off 0.68 percent, while hitting a six month low of 1.2850 Swiss francs (CHF=), off nearly 1 percent, according to Reuters data.
Gold hit a 7-1/2 year high in the wake of dollar weakness.
U.S. ACCELERATION
But the dollar drop comes amid more good news for the economy.
On Tuesday, November U.S. car sales data were generally strong, giving more reason to believe the U.S. economy, which grew at a blistering 8.2 percent overall in the third quarter is speeding ahead, whereas its peers in Europe and Asia are still languishing.
"I call this the death of fundamental (economic) analysis. Every piece of economic data points to a stronger dollar, but it is not having an impact," said a market source at a money center bank in New York who requested anonymity.
On Friday, the November payrolls report will give a better read on whether job growth, a lagging economic indicator, is finally confirming the growth seen elsewhere in the economy.
U.S. payrolls are expected to rise by 135,000, but the November unemployment rate is seen unchanged at 6.0 percent.
Elsewhere, the Bank of Canada kept interest rates steady at 2.75 percent on Tuesday, as expected. The U.S. dollar traded at C$1.2970 (CAD=).
The Reserve Bank of Australia is expected to hike rates 25 basis points to 5.25 percent when it meets late on Tuesday (New York time). The Australian dollar rose to a six-year high of US$0.7322 (AUD=) in anticipation of the rate increase. The Aussie dollar is now up some 30 percent since its 2002 close.
(Additional reporting by Gertrude Chavez and John Parry in New York and Justyna Pawlak in London) |
