Dollar, Near Record Low Versus Euro, Poised to Extend Decline
Dec. 1 (Bloomberg) -- The dollar may drop for a fourth week against the euro on concern foreign investors will buy fewer U.S. Treasuries the government is selling to finance its record budget deficit, according to a Bloomberg News survey.
The shortfall in the U.S., which Merrill Lynch & Co. estimates may widen to $600 billion in the fiscal year that began Oct. 1, combined with a record current-account deficit, prompted the dollar to weaken beyond $1.20 per euro for the first time.
``I'm hearing about the weak dollar all the time now,'' said John Cholakis, who trades euros in New York for Natexis Banques Populaires, a French lender. ``There's a real worry out there that if the Japanese and the Europeans would stop participating in U.S. Treasury auctions, there'd be a real run on the dollar.''
Eighty-four percent of the 49 analysts, investors and traders polled Friday from Tokyo to New York advised buying or holding the euro versus the dollar, little changed from a week earlier. Similar surveys predicted the dollar's slide in the past two weeks.
Cholakis, who was among those who recommended selling dollars and buying euros, said orders have been placed to sell the dollar between $1.2030 and $1.2050 per euro and at $1.21. The U.S. currency shed 0.7 percent last week to $1.1995 after dropping to a record $1.2018 on Friday.
``There is now more of a risk that the dollar moves down another leg,'' said Scott Barlass, who as director of currency risk, helps manage $22 billion at Abbey National Asset Managers in Glasgow, Scotland. ``The worry over the funding of the current- account is driving the dollar lower,''
Against the euro, the dollar may trade in a range of $1.20 to $1.25 for the rest of the year, Barlass said. The euro has climbed 14 percent this year versus the U.S. currency.
Foreign Investment
Demand for the dollar has waned after a Treasury Department report on Nov. 18 that showed international investors, including governments, bought a net $4.19 billion of U.S. securities in September, down from $49.9 billion in August and the lowest in five years. The dollar had its steepest drop in 2 1/2 years that day and weakened beyond its previous record low, set in May.
Fewer purchases of U.S. securities means the U.S. may have trouble financing its current-account deficit, which is at a record $138.7 billion. The U.S. government's budget gap widened to $374 billion last fiscal year. The Federal Reserve's target interest rate is at a 45-year low of 1 percent.
Twin Deficits
The U.S. is the only one of the Group of 10 largest industrialized nations that has both a deficit in its current account -- the broadest measure of trade and investment -- and negative three-month interest rates after taking into account inflation, according to Deutsche Bank AG.
``Even though we're seeing positive U.S. data, there's no likelihood of a Fed hike in the next six to eight months,'' said David Bradley, a currency trader at Bank of Nova Scotia in Toronto. ``There's going to be no interest-rate advantage'' in holding the dollar, he said.
The 16 percent of people surveyed who advised buying dollars against Europe's common currency said the dollar will benefit from further evidence that the U.S. economic rebound is starting to generate jobs.
A Labor Department report scheduled for release on Friday is expected to show the economy created 150,000 jobs in November, up from 126,000 the previous month, according to the median forecast of 49 economists surveyed by Bloomberg News.
Prospects for Rally
``The data has all been strong,'' said Jay Bryson, an economist in Charlotte, North Carolina, at Wachovia Corp., the fifth-largest U.S. bank by assets. ``You're going to see a little bit of a dollar rally.''
The Dollar Index, which charts the U.S. currency against a basket of six currencies from U.S. trading partners, fell as far as 90.04 on Friday, its lowest since January 1997. The index's record low is about 78 in 1992.
The index is weighted about 58 percent to the euro and 14 percent to the yen, with the remainder divided between the pound, Canadian dollar, Swedish krona and Swiss franc.
Brian Taylor at Manufacturers & Traders Trust in Buffalo, New York, is among those traders who said the euro must close above $1.20 for consecutive days before customers are confident it can extend its rally. It finished the week at $1.1995.
``You like to see a couple of days closing above that level'' of $1.20 to become more bullish on the euro, Taylor said. In the event it does close above that level on consecutive days, ``traders will keep buying it there,'' and that level will become a so-called support level, he said. Manufacturers & Traders Trust has about $50 billion of assets under management.
Yen, Pound Favored
Eighty-eight percent of people polled in the Bloomberg News survey advised buying or holding the yen against the dollar, 82 percent favored the British pound while 71 percent recommended buying or holding the Australian dollar.
The Fed will leave its target rate at 1 percent when policy makers meet on Dec. 9, according to all 59 economists polled by Bloomberg News in a separate survey. The Bank of England and the Reserve Bank of Australia raised rates last month to 3.75 percent and 5.25 percent respectively.
``From an interest rate perspective, it doesn't really pay to hold dollars,'' said Cholakis at Natexis Banques Populaires.
The following survey, taken on Friday, gauges demand for five currencies against the U.S. dollar:
Buy Sell Hold
Swiss franc 23 12 12
Japanese yen 25 6 18
Euro 24 8 17
British pound 27 9 13
Australian dollar 23 11 12
Demand for the euro against the Japanese yen:
Buy Sell Hold
Euro-yen 23 7 11
Last Updated: November 30, 2003 10:14 EST |
