Dollar slides close to parity with euro. Imagine the damage the small boys form S&P or Moodys would have done with their downgrades if those acts of corruption and collusion would have happened in other any other country other than the US.
But the market is the big teacher. The lesson will be taught.
Dollar slides close to parity with euro
By Christopher Swann in London
Published: July 9 2002 20:08 | Last Updated: July 9 2002 20:08
The dollar fell to within a whisker of parity against the euro and hit a nine-month low against the yen amid continued worries over US accounting standards.
The euro reached a peak of $0.9952 by the middle of New York trading, despite disappointing employment, production and survey data from the German economy.
"The euro has been toying with parity for some time," said Ray Attrill, director of research at the economic consultancy 4Cast. "When it goes, though, could well be determined by the quality of second quarter earnings by US companies which start to come out this week."
The pound continued to perform strongly on Tuesday, reaching its highest level in 26 months against the dollar at $1.547, compared with $1.436 in early April.
Analysts said this largely reflected the broad weakness of the dollar but also the resilience of the pound.
The pound has several attractions, said Joe Prendergast, head of currency research at Credit Suisse First Boston. "The generally stable economic picture in the UK is helping the pound as is the yield spread," he said.
"Expectations that a referendum on euro membership may take place later rather than sooner is also good for sterling."
David Bloom, currency strategist at HSBC, said the pound had been doing well partly because of the absence of attractive alternatives.
"Traders are still reluctant to buy the euro outright and the yen is restrained by the intervention of the Japanese authorities," he said.
Markets were back on parity watch on Tuesday as the euro pushed above $0.99.
But foreign exchange history suggests that the dollar will not surrender the parity level without a struggle.
Before the euro fell through parity in February 2000 there had been several attempts by traders to break through the level.
This is likely to be the case again, analysts said.
Mr Bloom said the parity level appeared to have a magical significance for the market. "As it approaches, the market seems to forget about the fundamental reasons why the dollar should go through parity and stops short of the level," he said.
Research by HSBC shows the half-hour correlation between dollar-euro rate and the S&P 500 has occasionally reached 100 per cent. But this breaks down as the dollar gets to within striking distance of parity.
This may be partly due to technical barriers, with banks defending options positions which lose their value at levels just above parity.
Mr Bloom said there was also a perception that the fall in the dollar would accelerate beyond euro parity and that traders remained cautious about taking this step.
This happened when the euro fell through parity in February and had tumbled to $0.94 by March.
The Polish zloty has been having a torrid time. Over the past month it has fallen 7.6 per cent against the euro and there is every prospect of more to come.
The main domestic reason has been the shift of finance minister. Many believe that the previous finance minister, Marek Belka, left due to frustration that his desire for tight fiscal policy was opposed by other cabinet members. His replacement Grzegorz Kolodko, who was finance minister in the 1990s, was known as an advocate of expansionary fiscal policy. The other worry for currency traders has been Mr Kolodko's advocacy of a move to a currency board, with a 15 per cent depreciation against the euro.
This transfer of power has taken place against a backdrop of concern about the broad strength of the zloty. The central bank has come under strong pressure to moderate the strength of the currency. This pressure may intensify under the new finance minister.
John Davitte, head of emerging market research at IDEAglobal, the economic consultancy, said that the zloty was being pressured from both sides.
"The internal political issues are causing problems, including the prospect of an erosion of support for the governing parties," he said. "In addition there has been the strength of the euro against the dollar, which has been helping to euro to advance against the zloty." |
