Dollar plumbs new lows on talks of central bank selling
LONDON (AFP) - The dollar trawled new depths against the euro, hit by signs that central banks in Russia and elsewhere are set to step up sales of the ailing US currency to buy euros.
The single European currency jumped to a new record high against the dollar, reaching 1.3158 dollars in early European trading.
It was the second straight day of record highs for the euro, which has been boosted by concerns about the large US budget and current account deficits.
The euro later eased back to 1.3148 dollars, against 1.3084 late on Tuesday in New York.
The dollar fell to 103.07 yen from 103.30 on Tuesday.
"The fundamental direction of the dollar is down -- the euro is likely to benefit by default," said BNP Paribas economist Ken Wattret.
"The interesting thing is the economic data has been dire, and yet the euro continues to go up, which tells you that growth differentials are not driving the exchange rates," he added.
The latest blow to the dollar came from comments from the Russian authorities hinting at plans to continue to switch their currency reserves into euros, to the detriment of the dollar.
"The euro is trading at another record high today above the 1.3100 level after the Russian authorities signalled their intention to continue with a policy of diversifying their currency reserves out of the US dollar and into the euro," said Derek Halpenny, economist at The Bank of Tokyo-Mitsubishi.
Russia holds about 92 billion dollars' worth of foreign currency reserves in total, he noted.
"A move to say 40 percent euro from possibly around 30 percent is a notable amount and highlights the support the euro may be deriving at present when you consider other central banks may also be diversifying out of the dollar."
But HBOS analyst Steve Pearson noted that it was not the first time that the Russian authorities had signalled its intention to diversify their currency reserves, and questioned whether the remarks were the real reason for the dollar's latest falls.
"Price action has very little to do with news, and plenty to do with momentum funds and active currency managers scenting blood," he said.
The market considers the dollar a one-way bet in the wake of last weekend's Group of 20 meeting of finance ministers and central bankers, where the prospect of concerted international action to stem the dollar's decline diminished further.
The European Central Bank or the Bank of Japan could intervene unilaterally to stem their respective currencies' appreciation against the dollar, but analysts said the chances of success were limited given negative dollar sentiment on markets.
The ECB's last foray onto foreign exchange markets was in late 2000, when it acted in coordination with other Group of Seven countries to buy euros and sell dollars after the European currency plunged to a record low of 0.8230 dollars.
The Bank of Japan is no stranger in the currency markets, having intervened on a regular basis over the last year to stem the yen's appreciation.
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