Ditto ... and Jay bought some Australian dollars and Swiss francs ... running as fast and in as m,any directions as possible.
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Traders Find Little Comfort in Dollar as Crises Deepen
iht.com
Eric Pfanner International Herald Tribune
Thursday, July 12, 2001
Copyright © 2001 The International Herald Tribune | www.iht.com
PARIS It is an axiom in the currency markets that when tremors rattle the global economy, investors seek safety in the dollar.
In the past week, however, as crises have deepened in several emerging market economies, the dollar has fallen about 3 percent against the euro. The European currency was at 85.96 U.S. cents in 4 p.m. trading in New York on Wednesday, up from 85.58 cents on Tuesday.
Some analysts say the surprising move suggests that a long-awaited shift in sentiment in the currency markets may now be at hand.
"There's this gut feeling that what we've had in the first six months is about to change, with respect to the dollar," said Alfonso Prat-Gay, head of foreign exchange research at J.P. Morgan in London.
Analysts say that any decline in the dollar is likely to be modest for now. They acknowledge that the U.S. currency has repeatedly defied predictions of an imminent decline against the euro, the single currency that 12 European countries have adopted.
But this time, they say, several things are different. The U.S. economy has sharply weakened, undermining its desirability as a destination for foreign investors' funds. Increasing their jitters are the economic problems in emerging markets such as Turkey and Argentina.
"All the conditions are in place for a weakening of the dollar," said Paul Meggyesi, currency strategist at Deutsche Bank Securities in London. "The whole emerging-markets situation may be the catalyst for a long-awaited return to reality."
Why would events in Buenos Aires or Ankara affect traders' perceptions of the dollar's relative value against the euro?
The answer is twofold, analysts say.
First, South American countries are major trading partners of the United States, and if exports to the region decline, that could increase pressure on the slowing U.S. economy.
"The U.S. stands to lose more from a blowout in Latin America than the rest of the world does," Mr. Meggyesi said.
More significantly, economists say, the crisis in emerging markets could undermine one of the key supports for the dollar over the last few years: an unending, one-way flow of capital into the U.S. economy as foreign investors sought to get in on the long-running boom. The United States has relied on these investors to finance a huge trade deficit. Even after U.S. stock prices collapsed, taking the steam out of the economy, the flows continued this year, as foreign investors shifted their appetite to bonds.
But amid concern about global instability in the markets, analysts said, foreign investors could grow wary about new investments, particularly in the United States. If they curb their buying spree, evening out the flow of capital into and out of the United States, the dollar is likely to suffer.
Based on economic fundamentals, Mr. Meggyesi said, the dollar is probably about 10 percent to 15 percent overvalued. But he said that any decline in the dollar was likely to be gradual rather than drastic. Hedge funds, normally big players in the currency markets, have currently placed only modest bets, he noted, a factor that could limit volatility. Mr. Prat-Gay said he expected the euro to rise to 90 U.S. cents this quarter, but that it could fall back to 85 cents later in the year.
Analysts say another factor still plays in the dollar's favor: the perception that the euro has been badly managed by the European Central Bank.
"I don't think anyone understands what their thinking is," Mr. Prat-Gay said. Other analysts add that the euro has been undermined by a lack of structural reform in the European economy, which has contributed to the exodus of investment to the United States.
Another wild card for the dollar is politics. Though a number of big American exporters argue that their goods are being priced out of foreign markets, analysts said they doubted that policymakers would take action to weaken it.
"The impact of the stronger dollar on U.S. growth prospects is very limited," said Carl Weinberg, chief economist at High Frequency Economics, noting that exports to Europe and Japan - the main currency barometers against which the dollar is measured - make up only a small fraction of U.S. economic output. "We think it is unlikely that Team Bush will push for a dollar intervention - the policy has almost no payback for the economy."
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