Umm, this guy has some nerve or is he stupid, or is he trying to play Nimble for his clients: "Thus, Citibank recommends reestablishing a long dollar/yen position, with a stop loss level at Y111.73." from:
Dollar Declines Across Board On Signal From G7
By TOM BARKLEY AND JAMIE MCGEEVER
Of DOW JONES NEWSWIRES
NEW YORK -- The dollar dropped across the board Monday, plunging to its lowest level against the yen in nearly three years after the Group of Seven leading industrialized nations meeting over the weekend called for more flexible currency policies.
The U.S. currency had already been sold heavily going into the G-7 meeting in Dubai, as investors were betting that Japanese monetary authorities wouldn't risk intervening before such a big political event, especially with Japan's Liberal Democratic Party holding elections over the same weekend.
That wager paid off when the G-7 communique urged "major countries or economic areas" to adopt "more flexibility" in their foreign exchange regimes to promote "smooth and widespread adjustments in the international financial system, based on market mechanisms."
This was viewed as a clear signal to Asian countries, in particular, to allow their currencies to appreciate more against the dollar and ease back on interventions to keep their currencies competitively weak, observers say.
When the market opened in Tokyo, the dollar fell to a 33-month low of Y111.37, a loss of about 6% from its intraday Monday, Sept. 15. The dollar later reached multi-month lows against the major European currencies as well.
The weakness in the currency hit U.S. equities and Treasurys, as well, over concerns that foreign investors would pull out of U.S. assets.
Late Monday, the dollar was at Y112.02, significantly lower than Y114.27 late Friday in New York. The euro was trading at $1.1480 after hitting a two-month high of $1.1506, up from $1.1371 late Friday. However, the single currency was also at Y128.63, down from Y129.72 late Friday.
Against the Swiss franc, the dollar was at CHF1.3546, recovering from a six-week low of CHF1.3502, but well below Friday's level of CHF1.3666. Sterling was at $1.6505, off a 2 1/2-month low of $1.6551, but up sharply from $1.6368 Friday.
Another reflection of the sour sentiment toward the dollar Monday was in the surge in gold to within a whisker of fresh seven-year highs. Gold, priced in dollars, traditionally rises as the dollar weakens because it becomes cheaper to foreign investors.
That relationship had shown signs of breaking down in recent weeks, but it firmly reasserted itself Monday, with spot gold climbing to $387.70 a troy ounce before settling at the end of New York trade up $5.35 at $386.85/oz.
Gold hit $388.50/oz in February. The last time it traded as high as that was seven years before.
The Bank of Japan, which carries out intervention on behalf of the Japan's Ministry of Finance, is expected to remain cautious about stepping in unless the dollar falls toward Y110. Further weakness is considered likely, according to analysts.
That's because despite the relative strength of the U.S. economy, the U.S. budget deficit and current account deficits are huge, with the current account gap requiring around $2 billion of foreign capital every working day just to keep the dollar stable. Perhaps as importantly, there is a perception in foreign exchange markets that the Bush administration is happy for the dollar to weaken.
U.S. Treasury Secretary John Snow said Monday, however, that there "has been no change in the U.S. strong dollar policy."
But David Bloom, currency strategist at HSBC Bank PLC in London, said the G-7's implicit call for less dollar-supportive intervention, from Japan and others, and more flexibility in exchange rate regimes, aimed at China, represents a case of "strong-dollar policy rest-in-peace."
The dollar's sharp movement has prompted some analysts to lower their forecasts for the dollar. UBS Investment Bank views the G-7 communique effectively as a call for countries across the globe to take their fair share of a broad decline in the value of the dollar.
UBS said in a research piece that the "statement is strong enough" to move up its three-month forecast of Y115 and six-month forecast of Y110, making them the one-month and three-month forecasts, respectively.
"The other clear message from the G-7 is that the dollar's long-term trend remains downward," said UBS.
Ram Bhagavatula, chief economist at Royal Bank of Scotland in New York, thinks the dollar will move into a lower range of between Y105 and Y110.
As the burden of the dollar's decline on global markets shifts toward Asian currencies and away from European currencies, the euro should begin to ease back from the $1.15 area to around $1.10-$1.12, Bhagavatula said.
However, several banks that have been bullish on the dollar still expect the U.S. currency to rebound, though even some of those lowered their target for the dollar's rise.
The dollar bulls based their view, in part, on the expectation that Japanese authorities will step back in, especially once this week's World Bank and International Monetary Fund meetings in Dubai have ended.
"We still believe the basic policy stance in Japan is the same and that they will stabilize the yen," said Hongyi Chen, currency strategist at Bank of America in New York. "If (the) yen goes to Y110 (to the dollar), it's going to hurt companies like Toyota and Canon, so I don't think the Japanese government will be able to tolerate it."
Indeed, Sadakazu Tanigaki, Japan's incoming finance minister, said Monday he wouldn't rule out large-scale intervention in currency markets if exchange rates get drastically out of sync with economic fundamentals.
Bank of America expects the dollar to move back up into a range Y113 to Y117 after this week, with a forecast of Y120 in a year.
Yet even without intervention, Chen believes the dollar will reach that level over the 12 months unless the structural and banking reform "takes hold" in Japan.
Even though the Chinese yuan and Hong Kong dollar are tightly controlled currencies, the dollar's plunge Monday filtered through to both.
Against the yuan, the dollar sank to a record one-year discount in the non-deliverable forward market. Market participants also noted that positions built up in NDFs hit record levels.
The dollar traded down to a 2,650-point discount to the yuan's spot price, which is kept in a tight band, moving around 0.3% either side of a CNY8.2770 midpoint.
This reflects expectations China might tweak its currency regime to allow the yuan to rise within the next 12 months.
At 2,650 points the NDF implies a 3.3% strengthening in the yuan against the dollar -- much greater than the leeway now permitted -- to CNY8.012 during the next year.
And the Hong Kong Monetary Authority uncharacteristically took no action Monday to prevent the dollar sliding sharply to around HKD7.7450 from HKD7.7950. At the close of local trade, the dollar settled around HKD7.7468.
---By Tom Barkley, 201-938-4385, tom.barkley@dowjones.com; -By Jamie McGeever, 201 938-2096, jamie.mcgeever@dowjones.com
Intuitively, it makes sense that the G-7 communique wouldn't deter someone who thinks the fundamental environment points to a stronger dollar. The finance ministers urged "major countries or economic areas" to adopt "more flexibility" in their foreign exchange regimes to promote "smooth and widespread adjustments in the international financial system, based on market mechanisms."
In other words, less intervention by Japan and a move by China to do away with the yuan's peg to the dollar.
As Merrill Lynch notes in a research piece, that's "meaningless" for dollar bulls, since they believe that G7 officials "will accommodate a rise in the dollar and (that) imbalances don't matter."
However, Merrill itself is bearish on the dollar, believing that "global imbalances justify a lasting decline in the dollar" due to the massive U.S. current account deficit. Viewing the G-7 meeting as "the start of a broadening of dollar weakness," the currency strategy team recommends being long against the U.S. currency with an equal-weighted basket consisting of euro, yen and Canadian dollar.
Of course, neither Merrill nor just about anyone else in the market expects the Japanese authorities to remain on the sidelines if the yen extends its 6% surge over the past week.
Thus, those who believe in a stronger dollar base that view in part on the expectation that Japanese authorities will step back in, especially once this week's World Bank and International Monetary Fund meetings in Dubai have ended.
"We still believe the basic policy stance in Japan is the same and that they will stabilize the yen," said Hongyi Chen, currency strategist at Bank of America in New York. "If (the) yen goes to Y110 (to the dollar), it's going to hurt companies like Toyota and Canon, so I don't think the Japanese government will be able to tolerate it."
Indeed, Sadakazu Tanigaki, Japan's incoming finance minister, said Monday he wouldn't rule out large-scale intervention in currency markets if exchange rates get drastically out of sync with economic fundamentals.
Bank of America expects the dollar to move back up into a range Y113 to Y117 after this week, with a forecast of Y120 in a year.
Yet even without intervention, Chen believes the dollar will reach that level over the 12 months unless the structural and banking reform "takes hold" in Japan.
Monday afternoon in New York, the dollar was at Y111.89, up from a 33-month low of Y111.37 that was reached in Tokyo, but down sharply from Y114.27 late Friday in New York. The euro was trading at $1.1492, up from $1.1371 late Friday. The single currency was also at Y128.589, down from Y129.72 late Friday.
Another argument for a stronger dollar is that the recent rally in the yen will actually cut off the foreign investment flows into Japanese equities that have been a major source of strength for the currency.
"It's clear that the key to a sustainable economic recovery Asia is continued exporter profitability," said
Greg Anderson, currency strategist at ABN-Amro B nk in Chicago, adding that profits would "dry up" if the dollar heads below Y110
He thinks the BOJ will intervene before it gets to that point, though.
Yet intervention is only part of the reason that ABN-Amro lowered its forecast for the dollar to Y111 in three months and Y117 to Y118 in a year.
The new levels, which were changed Monday from an August forecast of Y115 in three months and Y122 in 12 months, are "based on the thought that dollar/yen is going to bounce higher not on intervention, but in a natural reversal of flows," added Anderson.
Indeed, the Nikkei tumbled 463 points, or 4.2%, Monday to 10,475 on fears that a strong yen would hurt exports.
Net foreign buying had already begun to slow in the week ended Sept. 12 and will likely continue, notes Robert Sinche, head of global strategy at Citibank in New York, in a research piece.
Sinche dismisses dollar bears who have seized on the communique as evidence that concerns over the current account deficit will pull the U.S. currency down, saying the argument "does not stand up well" to an analysis of the data or global economic conditions.
Instead, he views cyclical measures as being supportive of the dollar through 2003. And technically, Citibank's dollar index bounced off support, so he sees the dollar's level against other major currencies as "quite attractive" for establishing or adding to long dollar positions.
Thus, Citibank recommends reestablishing a long dollar/yen position, with a stop loss level at Y111.73. |
