-- WSJ(12/16) Currency Trading: Dlr Faces Bad Wk On Fri Selloff --
By Grainne McCarthy and John Parry
Dow Jones Newswires
NEW YORK -- The dollar's bogeyman decided to show up on Friday the 13th,
foreshadowing a tough stretch this week for the U.S. currency.
Struck by a surge of selling from all angles, the dollar slipped Friday to its
lowest level against the euro in almost two years, as the single currency
finally pierced the line of option barriers around $1.02 to catapult higher. The
dollar also tumbled against other major rivals, sliding by more than two yen in
respect to its Japanese counterpart and almost 1% against the Swiss franc.
Analysts believe the currency is set to remain under pressure and vulnerable
this week, citing a string of reasons: jitters surrounding North Korea, Iraq and
Iran, the rally in the price of gold and a sense of limbo about the U.S.
Treasury Department sparked by the ouster of Paul O'Neill and nomination of John
Snow as Treasury secretary.
"Geopolitical risk is on the rise," said Shahab Jalinoos, a currency
strategist at UBS Warburg in London. "Then O'Neill was pushed out, and it was
just a matter of too much happening simultaneously."
This leg down for the dollar can be traced squarely back to the surprisingly
weak U.S. November jobs data -- showing unemployment jumping to a nine-year high
-- but the currency got an additional jolt from the shuffle of President Bush's
economic front line, announced shortly after the data was released, from which
it hasn't recovered.
While few market participants really anticipate Mr. Snow coming out with any
radical policy on the dollar -- such as publicly embracing a weaker currency --
the fact that he is a relative unknown is fueling already substantial
uncertainties in the market. With the nominee not set to be confirmed by the
Senate until some time in early January, those question marks surrounding his
intentions are likely to continue to dog the dollar.
Moreover, Mr. O'Neill is essentially a lame-duck Treasury secretary at a time
of considerable global unease.
Those tensions are feeding directly into the classic alternative to the dollar
-- gold -- as investors position themselves for what many feel to be the
inevitable: some sort of showdown with Iraq early in the new year. Now, analysts
believe, Asian investors are taking the same steps taken prior to the 1991 Gulf
War and switching out of dollars and dollar-based assets into the safe harbor of
gold, pushing prices to five-year highs.
In 1991, much of the selloff in dollar-denominated assets happened in the
run-up to the war, only to snap back afterward.
As of 4 p.m. Friday in New York, the euro was at $1.0229, below its session
high of $1.0257 but higher than Thursday's $1.0186 mark. The dollar was at
120.57 yen, off its global session lows but more than two full yen lower than
Thursday's level of 122.71 yen. Also, the dollar was at 1.4443 Swiss francs,
down from 1.4503 francs Thursday; and sterling was at $1.5894, up from $1.5818
Thursday.
The dollar's drubbing highlights the need for institutional investors to use
currency hedges to guard against further declines. It is also enhancing the
attraction of nondollar assets in general and European fixed-income securities
in particular.
"Recent events may push investors further into the view that it's more likely
to be a weaker dollar than a stronger dollar next year," says Paresh Upadhyaya,
currency analyst with Putnam Investments in Boston.
As the problems dogging the dollar have become more acute, there is recent
anecdotal evidence that foreign investors in U.S. assets "are putting [currency]
hedges back on in order to remove dollar exposure or reduce dollar risk," Mr.
Upadhyaya added.
Companies that obtain a large chunk of revenue from foreign currency engage in
hedging to protect against swings in exchange rates that may erode their
earnings, mainly by buying forward or options contracts that insure against
currency movements beyond specific levels.
Amid a climate of intensifying global risk aversion, foreign investors also
are tending to stick more closely to their domestic markets, says Jack Malvey,
chief global fixed-income strategist with Lehman Brothers in New York.
The dollar's woes are simultaneously a reflection and a cause of the
deteriorating sentiment seeping through U.S. asset markets. Even U.S. Treasury
bonds, which usually would garner more of a bid from investors as a perceived
haven in times of stock-market weakness, failed to rally Friday.
As the dollar loses more ground, that is one of the factors channeling
institutional flows elsewhere, tempting global bond-fund managers to look more
closely at European sovereign debt.
Some market participants feel this spate of dollar selling is temporary.
Strategists at Citibank, the largest foreign-exchange dealer, believe the dollar
will bounce back early next year. But as long as sentiment remains broadly
slanted against the dollar, currency traders might be prepared to punish the
currency in the event of softer-than-expected U.S. data reports this week while
shrugging off any mildly positive surprises.
(END) Dow Jones Newswires
12-15-02 1948ET- - 07 48 PM EST 12-15-02
16-Dec-2002 00:48:00 GMT
Source WSJ - Wall Street Journal |
