10 Dec 2003 14:40 ET =DJ FOREX VIEW: Dollar Lacking Friends In High Places
By Agnes T. Crane
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--At this point, it looks like only an actual rate increase from the Federal Reserve or outright intervention from the U.S. Treasury can stop the dollar's slide - and neither of these events is expected to happen any time soon. While the dollar's all-time lows against the euro and multi-year lows against other currencies over the last week have grabbed headlines, the weakness is anything but unwelcome in the U.S.
On Tuesday, the Federal Open Market Committee signaled that while it may be closer to raising short term interest rates than it was at its last meeting, it still plans to keep its federal funds target at 1.0% for a "considerable period."
The U.S. bond market interpreted that nebulous phrase to mean that by mid-2004 the Fed will have increased rates by at least 25 basis points. That is more than six months away, and hardly a big jump in rates from the already historically low 1.0%.
What's more, six months is an eternity for currency market participants who have become more and more reluctant to hold dollars amid more immediate concerns such as the diversification of foreign reserve holdings away from the buck.
Some say only a bold move by the Fed will ultimately reverse the tight bearish grip on the dollar.
Marc Chandler, chief currency strategist at HSBC in New York, said: "I think the case can be made that that fed funds would have to be at least 50 basis points higher to warrant a stronger dollar."
The dollar could still get a lift early next year as part of a correction to December's sharp selloff, but to break what has become an entrenched downward trend, currency participants will want to see an active Fed before betting on the dollar.
Treasury Not The Dollar's Knight In Shining Armor Either
Few expect Treasury, which has played a more direct role in the fortunes of the dollar in the past, to step in either.
With inflation still benign, a weaker dollar poses little danger to the overall economy, and for the time being actually helps fuel activity since it makes U.S. products cheaper abroad.
The Bush Administration, with its eye on next year's election, is unlikely to tamper with such a winning scenario, unless of course the pace of the dollar's decline accelerates to such a point that panic sets in among investors.
Alan Ruskin, research director at 4Cast financial consultancy in New York, said it's hard to see Treasury officials getting worked up about the dollar as long as the euro stays below $1.35. A euro that high would be sure to make officials on both sides of the Atlantic uncomfortable. A rising euro, especially if it rises quickly, threatens to undermine Europe's emerging economic recovery, not to mention damp demand for dollar-denominated assets in the U.S.
"We're a long way away from that scenario," said Ruskin. "Unless the dollar weakness is really creating serious instability in dollar asset markets, I can't see Treasury" ushering in a program of "prolonged intervention."
The last time Treasury intervened was in 2000 when the government bought EUR1.5 billion in a coordinated effort with the European Central Bank to strengthen the euro, which at the time languished below $0.85. The euro now trades around $1.22.
Little Bite Behind Strong Dollar Policy Bark
As for the much touted "strong dollar policy" that still gets pulled out by both Treasury and administration officials from time to time, few in the market attach too much significance to what had been an effective mantra used first by the Clinton Administration to reassure currency markets.
Earlier this year, the policy lost any significance it once had for currency markets when Treasury Secretary John Snow weighed in on the subject at a meeting of the Group of Seven industrialized nations earlier this year.
"Snow redefined strong dollar and nowhere in his definition was the currency's external value mentioned," noted Robert Lynch, currency strategist at BNP Paribas in New York.
This has led many to believe that the government actually wants the dollar to weaken as a means of providing further stimulus to the economy, on top of the tax cuts and extremely easy monetary policy.
"Part of this story is people don't believe this strong dollar policy means anything," said Lynch. "There isn't any confidence that that policy bares any teeth" and therefore, will not be backed up with any type of policy action. Unless of course, investor confidence tanks and foreign investors put their funds elsewhere.
"I'd never exclude the chance (of intervention), but it still seems like a low risk probability," said Lynch.
-By Agnes T. Crane, Dow Jones Newswires, 201-938-2122;
agnes.crane@dowjones.com
(END) Dow Jones Newswires
December 10, 2003 14:40 ET (19:40 GMT) |
