Dollar Hits Multi-Month Lows, Prompting Talk of Bear Market
online.wsj.com
By GRAINNE MCCARTHY
DOW JONES NEWSWIRES
NEW YORK -- Like oxygen fanning a flame, the swirling wave of negative dollar sentiment piled more pressure on the currency Thursday, sending it to fresh multi-month lows against the majority of its counterparts and prompting talk of a major bear market for the greenback.
In an unusually volatile market, the dollar reached its lowest point against the euro in almost 16 months, a six-month trough against the yen, close to a seven-month low versus sterling and perhaps most remarkably, its weakest level against the Swiss franc in 29 months. The dollar also remained around long-term lows against secondary currencies, such as the Australian and Canadian dollars, while hitting a 23-month low against the New Zealand dollar.
Late in New York, the euro was at 93.76 U.S. cents, off its intraday and almost 16-month high around 94.16 cents but still up from 93.57 cents late Wednesday in New York. The dollar was also at ¥123.27, somewhat recovered from its session and six-month low of ¥122.86, but well down from ¥124.40 late in New York Wednesday.
Sterling was at $1.4648, up from $1.4620 late in New York yesterday. The dollar was at 1.5605 Swiss francs, down from 1.5672 francs late in New York.
Although the dollar did win some degree of relief later in the day, more and more people are starting to believe that the days of the mighty dollar are finally over, a phenomenon that has implications both for U.S. consumers, manufacturers and the rest of the world. Federal Reserve Bank of Dallas president Robert McTeer, in rare comments, even went so far as to mention the dollar Thursday, noting that "the cause of the strength of the U.S. dollar until recently is a mystery to me as well."
The White House also issued some rare words on the currency, with spokesman Ari Fleischer saying that the administration's dollar policy hasn't changed. But currency traders took this as yet another signal that the Treasury wouldn't act in any way to stem the dollar's decline.
"The fact that this is the second time this month the White House says its position on the currency is unchanged -- without using the word strong -- is a gentle approval to the falling dollar," said Ashraf Laidi, chief currency analyst at MG Financial in New York.
Long accustomed to holding the globe's strongest and most stable currency, the U.S. has reaped major resultant benefits over the past few years, ranging from record foreign investment in bonds and stocks to American holiday-makers enjoying an international bonanza on the back of the amazingly resilient currency. The strong dollar has also given the Federal Reserve some peace of mind in helping to keep inflation benign, leaving the central bank free to concentrate on steering the U.S. economy back on to a firm growth track.
The dollar even managed to remain relatively strong last year, despite a slowing economy and the deep shocks of the Sept. 11 terrorist attacks. Now, everything appears to have changed, with factors that the dollar had shrugged off only six months ago -- such as the prospect of a less rapid rebound in the U.S. than many had hoped for -- now prompting a broad sell-off of the currency.
"The market always seemed to see the glass as half full, now it seems to have turned completely and sees the glass as half empty," said Alan Ruskin, research director at 4Cast financial consultancy in New York.
The weakness is being driven by general skepticism about a rebound in U.S. corporate earnings, as well as questions about how the U.S. will continue to finance the gap in its current account deficit, particularly at a time when the government is also running a federal budget deficit.
"The return of twin deficits is a factor that could explain why the dollar appears fragile," said Corey Redfield, chief fixed income strategist at U.S. Bancorp Piper Jaffray in Chicago. Sustained dollar weakness could come to weigh on the bond market at some point, he said.
Indeed, while many foreign exchange analysts have been predicting the dollar's gradual decline for some time, the unit's demise has now reached such proportions that it's sparking a chorus of commentary outside of the foreign exchange world. "It appears that we've passed a turning point and it's getting people's attention," said Edgar Peters, chief investment officer at Panagora Asset Management in Boston.
The dollar's sell-off is certainly gaining momentum and many currency forecasters expect the unit to head lower both in the short and medium-term, a factor that's prompting more and more questions about what the decline means for U.S. assets and growth generally. Perhaps the most bearish scenario would see a vicious circle, under which the sale of U.S. assets will propel more dollar weakness which in turn will cause foreign investor returns in the U.S. to fall further, triggering yet more asset sales.
That won't necessarily happen if the decline is fairly gradual and orderly, which up until now, has generally been the case. But a sharp dollar decline could dent U.S. economic growth prospects, posing risks to a sustained, non-inflationary recovery, Goldman Sachs chief economist William Dudley said in a report Thursday.
Just what constitutes a "sharp" dollar decline isn't clear, however and in many ways the weaker dollar could be more positive than negative for the U.S. economy, not least because it will inflate earnings of many U.S. manufacturers and multinationals that do business overseas. "We were looking for this and we welcome it," said Hank Fox, a spokesman for the National Association of Manufacturers in Washington.
The NAM, which for months has been calling on the Bush administration to abandon its strong dollar policy, cites Treasury Secretary Paul O'Neill's dismissal of intervention as a tool to influence currencies -- in Capital Hill testimony earlier this month -- as a major contributing factor to the dollar's slide.
Analysts reckon Japan's monetary authorities, on the other hand, might act to brake the rampaging yen, but there was no sign of the government's agent -- the Bank of Japan -- during New York trading Thursday. This is despite the fact that the dollar slipped by over one and a half yen during the session. |
