Dollar Declines to Record, Poised for Worst Year Against Euro
Dec. 31 (Bloomberg) -- The dollar fell to $1.26 against the euro for the first time, heading for its biggest annual drop on low U.S. interest rates relative to Europe and signs the Bush administration and the European Central Bank aren't concerned about the slide.
The dollar remained lower even after a government report showed U.S. jobless claims fell to the lowest in almost three years. The Federal Reserve has said it won't rush to raise its target interest rate from a four-decade low of 1 percent, which is half the ECB's rate. On a trade-weighted basis, the U.S. currency has shed the most this year since 1986.
``Until the Fed starts to suggest they will raise rates there are very few reasons to buy dollars,'' said Monica Fan, a currency strategist in London at Royal Bank of Canada, in a televised interview with Bloomberg News. ``We could see a move to $1.30 per euro by the end of the first quarter.''
The dollar has fallen almost 17 percent this year against the euro, and was trading at $1.2638 at 8:35 a.m. in New York from $1.2551 late yesterday in New York. It fell to a record $1.2649. The dollar also headed for the largest yearly decline in five against the yen, trading at 106.91 yen from 106.97.
Against a basket of major currencies measured by the Fed's Trade Weighted Dollar Index, the dollar has dropped 14.5 percent, the most since the year after Group of Seven finance ministers met at the Plaza Hotel in New York and agreed to let the dollar weaken.
ECB president Jean-Claude Trichet has said he favors a strong euro. U.S. Treasury Secretary John Snow this month described the dollar's slide as ``orderly.''
The dollar remained lower today even after the number of Americans filing first-time applications for state unemployment benefits fell more than forecast to 339,000 last week.
Terror Concerns
Some traders also sold on concern there may be a terrorist attack during the New Year's holiday. German police sealed off a military hospital in Hamburg, saying Islamic terrorists planned to bomb the building. Small airplanes were yesterday banned from flying over New York and Las Vegas.
``Terrorism fears are dominating today,'' said Lee Ferridge, head of currency strategy at in London at Rabobank Groep NV, the third-largest Dutch bank. ``The lack of volume accentuates the effect of any trading that needs to be done''
Financial markets around the world will be shut on Jan. 1. U.S. bond markets will close at 2 p.m. New York time today and Friday, and markets in Japan shut yesterday for the week.
``A lot of players have packed up and gone home,'' said Steven Saywell, a currency strategist at Citigroup Inc., in a televised interview with Bloomberg News in London. In the meantime, ``the trend is your friend and the trend is for a stronger euro and a relatively weak dollar.''
Interest Rates
Bundesbank board member Hans Reckers said yesterday in a telephone interview with Bloomberg News the European Central Bank's target rate of 2 percent is ``appropriate.'' His comment followed Trichet's remarks in an interview with the Wall Street Journal on Dec. 18, that he favors a ``strong and stable'' euro.
The yield on the 1 7/8 percent U.S. Treasury note maturing in December 2005 was 1.83 percent. The yield on a German government note of similar maturity was 2.46 percent.
Deutsche Bank AG recommends selling the dollar against both the euro and the yen. Germany's biggest bank forecast the U.S. currency will drop to $1.30 against the euro and 99 yen in 2004.
``If we were to assign risks to those forecasts, we would give a higher probability to the dollar losing even more ground than we are currently projecting,'' Michael Rosenberg, global head of foreign exchange research at Deutsche Bank in New York, wrote in the bank's ``FX Blueprint for 2004'' report.
`Guerilla Campaign'
The yen strengthened in 2003 as Japan's economy is forecast to expand for a second year, prompting international investors to push up the Nikkei 225 Stock Average 24 percent.
Against the dollar, the yen has climbed 11 percent this year even as Japan spent a record of more than 20 trillion yen ($187.1 billion) to stem the currency's appreciation. Overseas investors were net buyers of Japanese shares for all but four of the past 36 weeks, pushing the Nikkei higher for the first year in four.
The dollar has declined less against the yen than the euro as the Bank of Japan, at the behest of the Finance Ministry, sold a record 21.1 trillion yen ($200 billion) this year in an effort to slow the yen's appreciation.
``The only thing standing between the yen and 100 is the BOJ and MOF,'' said Greg McKenna, a currency strategist in Sydney at National Australia Bank Ltd., Asia's biggest bank by assets outside of Japan. ``Japanese officials will fight a guerilla campaign of hit and run'' selling to slow the yen's appreciation.
Plaza to Dubai
At the Plaza meeting in 1985, the G-7 said the dollar's strength was one of several `problems'' facing the global economy, that a weaker dollar was `desirable.'' In Dubai last September, the group urged more flexible exchange rates, suggesting they are seeking a weaker U.S. currency.
Snow, who sought the language on flexible currencies be included in the G-7 statement, said in a televised interview with Bloomberg News on Dec. 12 that the dollar's ``adjustment process has been orderly.'' After he finished speaking, the dollar weakened beyond $1.23 per euro for the first time.
``The market decided that if the U.S. administration wanted a weaker dollar, it would get it,'' Paul Chertkow, head of global currency research at Bank of Tokyo Mitsubishi in London, said in a televised interview with Bloomberg News.
One problem with the Plaza Accord's call for a cheaper dollar was the dollar wouldn't stop falling. The decline brought about another agreement, called the February 1987 Louvre Accord, which said a further drop in the dollar ``could damage growth'' in the U.S. and elsewhere.
Exports Vulnerable
The yen's advance risks eroding demand for Japanese exports. The world's second-largest economy will grow 1.8 percent in the 12 months starting April 1 as companies increase spending and exports rise, the government said on Dec. 19. Exports and capital spending accounted for all the 0.3 percent growth last quarter.
Toshiba Corp., the world's third-largest chipmaker, predicted the yen's exchange rate would average 115 in the second half of the fiscal year that ends March 31. Nissan Motor Co. forecast a rate of 110. Most Japanese companies gave projections when they reported earnings for the six months ended Sept. 30.
``Were it not for their efforts, the yen would probably be at 98 now, and that is not in the interests of the fragile and probably faltering Japanese recovery,'' McKenna said of the BOJ currency sales.
The Fed's trade-weighted index for major currencies gauges the dollar against a basket including the dollars of Australia and Canada, the euro, the Japanese yen, Swiss franc and Swedish krona.
Last Updated: December 31, 2003 08:43 EST |
