Dollar Weakens on Speculation Demand for U.S. Assets Will Wane
Dec. 30 (Bloomberg) -- The dollar fell against the euro and the yen in Asia, heading for a third yearly loss, on speculation demand for U.S. assets is waning.
Bids for two-year U.S. Treasury notes at an auction yesterday from investors including foreign central banks was the lowest in a year. The dollar is down 7.6 percent against the euro and 3.3 percent against the yen this year, fueled by expectations the U.S. and Europe will refrain from halting its drop.
U.S. policy makers ``are perfectly happy with the dollar declining,'' said Kenneth Landon at JPMorgan Chase & Co. in New York. ``They're very happy with the current trend.''
Against the yen, the dollar fell to 103.68 at 2:26 p.m. in Tokyo from 103.86 in New York yesterday, according to electronic currency trading system EBS. The dollar was at $1.3628 per euro, from $1.3608, having yesterday fallen to a record for a fifth day, weakening as low as $1.3647.
The dollar may fall to $1.40 per euro and 93 yen in the first six months of 2005, Landon said.
Moves may be exaggerated because trading will be less than usual in the daily $1.9 trillion currency market, said Robert Rennie, a currency strategist in Sydney at Westpac Banking Corp.
``There's business going on, but not much,'' he said. ``Dealing rooms are working with holiday staff.''
A weakening dollar has reduced returns for foreign investors on U.S. Treasuries, which this year ranked among the lowest of the world's debt markets. At a two-year note auction yesterday, indirect bidders, which include foreign central banks, bought 34 percent of the $24 billion of securities, compared with 43.5 percent last month.
`Buying Power'
Treasuries due in more than a year returned 2.9 percent including reinvested interest, according to the European Federation of Financial Analyst Societies. Of 26 indexes, only Japan returned less.
Investors based outside the U.S. in September held $1.85 trillion of the $3.8 trillion in marketable U.S. notes outstanding during that month, according to Treasury Department statistics.
``The depreciation of the U.S. dollar means the buying power of Treasuries for foreign investors is reduced,'' said Kazuaki Oh'e, a Tokyo-based bond salesman at CIBC World Markets Corp.
Foreign purchases of U.S. financial assets rose at the slowest pace in a year in October, Treasury Department figures showed on Dec. 15. Foreigners bought a net $48.1 billion in Treasuries, corporate debt, stocks and other financial assets, down from $67.5 billion in September.
`Other Side'
The yen fell to a record against the euro in Asia on speculation Japan will sell its currency during the New Year's holiday period as Europe refrains from acting to halt the European currency's rally.
The Bank of Japan sold record amounts of its currency in the first quarter, helping limit the yen's gains versus the dollar this year. The BOJ also sold yen the last three days of 2003, while the European Central Bank hasn't sold euros since 1999.
``If you're bearish on the dollar, as everyone is, it's best not to do it through the yen,'' Westpac's Rennie said. ``At the end of the year, there's some concern the other side of a trade is going to be the Japanese authorities.''
Finance Minister Sadakazu Tanigaki on Dec. 28 said Japan ``will closely watch the exchange rate'' during the holidays. Bond and stock markets in Tokyo closed for the year after morning trading, and Japan has holidays tomorrow and Jan. 3.
The Nikkei 225 Stock Average rose for a second year, gaining 7.6 percent, raising speculation overseas investors will add to their holdings of Japanese shares. Investors based outside Japan have been net buyers of stocks in all but nine weeks this year.
`Some Action'
A weaker local currency inflates the value of exporters' dollar-denominated sales. Japan sells more of its exports to the U.S., the world's largest economy, than any other country. Fuji Heavy Industries Ltd., the maker of Subaru-brand vehicles, last month said it had a 43 percent decline in second-quarter net income in part from the yen's rise against the dollar.
The Bank of Japan, at the behest of the Ministry of Finance, sold 14.8 trillion yen ($142.1 billion) from January to March and hasn't sold since, according to data through Nov. 26. The ministry will release figures for December at about 7 p.m. today in Tokyo.
``There may well be some action from the BOJ'' during the holidays, said Chris Loong, manager of foreign exchange at AMP Capital Investors in Sydney, who helps oversee about $3.5 billion.
Pressure
The U.S. is seeking a weaker currency to shrink its current- account deficit, said analysts including Landon.
Federal Reserve Chairman Alan Greenspan told the European Banking Congress in Frankfurt on Nov. 19 that foreigners will grow weary of financing a gap in the current account and will eventually diversify their holdings into currencies other than the dollar.
The shortfall in the U.S. current account widened to a record $164.7 billion in the last quarter, meaning the U.S. needs to attract $1.8 billion each day to keep its currency from dropping.
``The U.S. current-account deficit is increasing, and that's going to keep pressure on the dollar,'' Landon said.
To contact the reporter on this story:
John Brinsley in Tokyo at jbrinsley@bloomberg.net.
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