Dollar narrowly avoids euro parity
Hi J!
USD is being pumped up to avoid further devaluation. Another country would have to come to IMF, submit to tough conditions in order to have the funds to prop up its currency.
The beauty of having a currency of choice is that if it drops, it cause widespread damage. Hence the US FED doesn't have to do anything: The holders of USD defend the currency since it is on their own interest not to have the USD goes 1.5/Euro.
Dollar narrowly avoids euro parity By Christopher Swann
Published: July 10 2002 22:02 | Last Updated: July 10 2002 22:02
The dollar had another close brush with parity against the euro on Wednesday but managed to pull away from the psychologically important level in later trading.
Analysts said the dollar had been saved by a host of technical factors. Market participants spoke of an options barrier at parity - with a large bank trying to stave off a rise in the euro to $1 to protect the value of an exotic option. There were suggestions in the market that this option would expire in today's trading, leaving the path open for a move to parity.
Marc Chandler, chief currency strategist at HSBC in New York, said the euro may have to wait a little longer before hitting $1.
The dollar won another stay of execution, avoiding parity by 0.03 cents. The reason cited by analysts was an adjustment of the S&P 500 index to remove a pair of European companies - Royal Dutch and Unilever - and five Canadian companies.
Estimates suggest that the result could be $10-12bn of dollar purchases before July 19, when the reshuffle becomes effective.
Since the European shares were American Depository Receipts, traded in dollars, the effect of the reweighting will be indirect. On the margin, traders said that the reweighting would give a boost to several US shares while hurting the stocks evicted from the index.
Although the reweighting may have acted as a brake on the dollar's fall, index reweightings have tended to be overhyped.
The reweighting of the MSCI in November 2001 and May 2002 - which increased the weighting of US stocks at the expense of the eurozone - became one of the most discussed issues of the past few years. However, later capital flow figures suggested the move had had little effect.
"This kind of index change is not going to affect the direction of euro-dollar except in the very short term," said Derek Halpenny, currency economist at Bank of Tokyo-Mitusbishi in London. "Sentiment is still very negative on the dollar."
Mr Halpenny said the main hope for the dollar lay in a positive corporate reporting season and an end to the recent flow of accounting scandals emerging from US companies.
Impatience is growing among certain traders over euro parity with the dollar.
It has been two weeks since the euro reached $0.999 and many thought that the psychological level would be breached yesterday after the euro hit $0.997.
Alan Ruskin, director of research at the economic consultancy 4Cast, said the delay suggested that the euro had temporarily run out of steam.
He said the push above parity for the euro may be driven by moves in the yen.
"There are signs that the Japanese authorities have lost some of their appetite for intervention," he said. "Unless they return to the market soon, a sharp fall in the dollar against the yen could drag the dollar lower against the euro."
Recent rhetoric by Japanese officials has suggested a realisation that to halt the rise of the yen, they would have to prop up the dollar across the board - a much more formidable challenge.
"So far the Japanese authorities have intervened to the tune of about $20bn and do not have a great deal to show for it," said Mr Ruskin. "But if they allow the dollar to drift down to around Y116.9, this could be the catalyst for a fall through parity against the euro."
Russell Jones, head of currency research at Lehman Brothers, said although the Japanese economy remained a mess, there were reasons for optimism on the yen.
A pick-up in global export demand has been boosting the Japanese current account surplus. Uncertainty in financial markets and doubts over US accounting standards have led capital flows to dry up, favouring currencies with large current account surpluses.
On the domestic front, Japanese asset markets were also likely to promote a rise in the yen. "International investors are still underweight Japan and fair value models suggest there is good value in the Japanese markets at the moment," said Mr Jones. |
