Dollar Weakens to Record; U.S. Says Terrorism Risks Increasing
Dec. 22 (Bloomberg) -- The dollar fell to a record versus the euro in New York after the U.S. raised its security alert because of what officials called a ``substantial increase'' in the potential for terrorism during the year-end holidays.
Homeland Security Secretary Tom Ridge raised the alert to ``high'' from ``elevated.'' The dollar extended a drop that has it headed for the biggest annual decline against the euro, down 15 percent, as higher interest rates in Europe lured investors.
``This has aided the market to continue in the direction it wanted to go,'' said Steve Pearson, chief currency analyst in London at HBOS Treasury Services Plc, in a televised interview with Bloomberg News. The dollar's drop ``has been a one-way street,'' he said.
Against the euro, the dollar weakened to $1.2438 at 7:24 a.m. in New York, from $1.2374 late Friday, according to EBS prices. Earlier, it reached $1.2450, the lowest since the euro's debut in January 1999. The U.S. currency fell to 107.38 yen, from 107.81.
The U.S. Dollar Index, which tracks the dollar against a basket of six currencies, including the euro, British pound and Swiss Franc, fell as low as 87.78 from 88.15. The index is down 14 percent this year.
Treasuries and gold, traditional havens in times of risk aversion, rose. The 4 1/4 percent note due in November 2013 rose about 1/8, or $1.25 per $1,000 face amount, to 101, and its yield fell 1 basis point to 4.13 percent. A basis point is 0.01 percentage point.
Gold for delivery in February rose as high as $412.50 in electronic trading on the Comex division of the New York Mercantile Exchange.
Interest Rates
``It will be more of the same for the dollar over the next week or so,'' said Folker Hellmeyer, a currency analyst at Bremer Landesbank Kreditanstalt, a state bank, in Bremen, Germany. In addition to terrorism concerns, ``the U.S. is the most indebted country in the world. Why should there be any inflow?''
The Federal Reserve's key interest rate is at a 45-year low of 1 percent, half that of the European Central Bank's. The yield on the 1 7/8 percent Treasury note maturing in November 2005 was 1.75 percent. A German note maturing the same year yielded 2.48 percent.
Bets by futures traders that the euro will strengthen rose to about 34,800, the highest since May 2002, from 28,000 a week earlier, figures from the Washington-based Commodity Futures Trading Commission. Bets on a euro increase outnumbered those on a decline by about eight to one.
Wagers that the yen would gain against the dollar rose to a 19-year high. The difference in the number of wagers by hedge funds and other large speculators on a gain in the yen compared with those on a drop -- so-called yen net longs -- rose to about 58,200, from 56,700 the week before.
Terror Alert
This is the fifth time the alert has been raised to orange since the system was created in response to the Sept. 11, 2001, attacks. The threat has never been at red, blue for ``guarded'' or green for ``low.''
The U.S. currency has declined this year on concern interest rates lower than those in the euro zone will discourage foreign investors from buying debt the U.S. is selling to fund a budget deficit that Merrill Lynch & Co. predicts may widen to $600 billion this fiscal year.
``Foreigners are reluctant to invest as much in the U.S. as they have been in the past,'' said Robert Hormats, vice chairman of Goldman Sachs International, in a televised interview with Bloomberg News in New York. ``That's putting the dollar under downward pressure.''
Seventy percent of the 47 strategists, investors and traders polled Friday from New York to Tokyo advised buying or holding the euro versus the dollar. Most also favored purchasing or holding the dollar versus the yen on concern the Bank of Japan will sell its currency to curb gains. The European Central Bank isn't likely to sell its currency, they said.
Holidays
Trading this week is likely to be less than usual in the daily $1.2 trillion currency market due to the holiday season. Tomorrow is a holiday in Japan and markets in Europe and North America will be closed on Thursday for Christmas.
``I'm probably the only analyst in the city working,'' said Pearson at HBOS.
The University of Michigan tomorrow will probably report consumer confidence rose in December to 90.6 from 89.6, according to the median estimate of economists polled by Bloomberg News. The Commerce Department on Wednesday may show that orders for durable goods rose for a third month, a separate survey showed.
Japan's central bank spent a record 17.8 trillion yen ($164.9 billion) from January through Nov. 26 in an attempt to stem the yen's 9.4 percent gain this year against the dollar.
`Unlimited Firepower'
Zembei Mizoguchi, vice finance minister for international affairs, said Japan will ``be responsive to large fluctuations, given recent market moves.''
The Ministry of Finance is asking that the borrowing limit for foreign exchange purchases be raised by 21 trillion yen this fiscal year and by an additional 40 trillion yen for currency purchases next year. The requests were included in the ministry's budget proposals submitted to the Cabinet earlier today.
This shows Japan's ``determination to slow any yen appreciation,'' said Pearson at HBOS. ``When you print your own currency, you've got unlimited firepower and can sell as much yen as you want.''
Last Updated: December 22, 2003 07:40 EST |
