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Strategies & Market Trends : Currents of Currency -- Ignore unavailable to you. Want to Upgrade?

To: The Wharf who wrote (92)	11/2/2004 5:02:39 PM
From: The Wharf	Read Replies (1) \| Respond to of 594

yomiuri.co.jp ECONOMIC FORUM / U.S. currency set to hit postelection watershed Masaichi Nosaka With attention in the United States and around the globe focused on the U.S. presidential election, the dollar's downward trend has continued with the greenback briefly falling into the 105 yen zone last week. A stronger yen against the dollar comes after a period in which the dollar hovered around 110 yen, a value considered favorable to both Japan and the United States. Signs are emerging of postelection change on the currency market. Market players seem poised to accelerate selling of the dollar in anticipation of exacerbation of twin U.S. deficits in the current account and federal budget as well as expectation that postelection U.S. foreign exchange policy will lean toward further weakening the dollar. If Sen. John Kerry is elected, the dollar is likely take a conspicuous downward trend, but even if President George W. Bush secures a second term the world's key currency will enter an adjustment phase, according to analysts. Japanese monetary authorities are alarmed by the dollar's decline against the yen. Hiroshi Watanabe, vice finance minister for international affairs, said recently, "The tempo of the recent rise of the yen against the dollar seems a little too fast, so we are ready to take firm action if necessary." The top currency official suggested that monetary authorities may, depending on circumstances, intervene in the market to stem sharp rises in the yen against the dollar. Given that recovery of the Japanese economy is not yet solid, yen-dollar exchange fluctuations around 110 yen until early October were at "a comfortable level," according to a market dealer. A relatively lower value of the Japanese currency is considered conducive to sustainable business recovery driven by rises in exports to the United States. If the trend changes to a rapid rise in the yen, Japan's export-oriented industries may be hit hard. Monetary authorities have been understandably concerned that such a development could jeopardize recovery prospects. To fend off accusations by Kerry of economic mismanagement, Bush stressed repeatedly during the election campaign that the U.S. economy was in good shape. That strategy was behind emphasis by the administration on its commitment to maintaining a strong dollar, as noted by Treasury Secretary John Snow, brushing aside the preference of business leaders for a weaker dollar. But during the campaign, U.S. monetary authorities repeatedly urged China, which has a growing trade surplus with the United States, to take steps to revalue the yuan upward. This indicates that the United States was not happy with the dollar hovering around 110 yen, seeking to keep that exchange level for political expediency. So, postelection U.S. monetary policy is expected to support the trend for a weaker dollar against the yen, according to economists. Market players have already factored in a bearish postelection trend. The deterioration of U.S. government finances and expansion of the current account deficit, the twin deficits, are also attracting the attention of the market. U.S. deficits for the fiscal year of 2004 (from October 1, 2003, to Sept. 30 this year) amounted to an all-time high of 412.5 billion dollars. Large-scale tax cuts and a sharp increase in defense spending resulted in the massive deficit. Washington was able to narrowly fill the gap of a worsening current account deficit with cash returned to the United States from overseas, including from Japan and other Asian nations. Bush declared that if he is reelected, he will make temporary tax cuts permanent and reduce budget deficits by half in the next five years. Kerry has gone on record vowing to increase the health care budget by doing away with preferential tax arrangements for the rich. But both candidates have stopped short of announcing any convincing proposal to recover fiscal health, making it unlikely that deep cuts will be made to the federal budget by the new administration. Exacerbation of the twin deficits is certain to erode the foundation of the dollar. Indications are that the new administration will have no alternative but to maintain a weaker dollar in order to reduce the current account deficit. The United States cannot allow the deficit to grow further. If Kerry, who has insisted that domestic job opportunities are threatened by foreign labor, is elected, pressure will surge for a protectionist trade policy and further depreciation of the dollar. Even if Bush is reelected, there will be no room for his administration to avoid addressing adjustment of the dollar's exchange value. Sometime after the election, U.S. foreign exchange policy is sure to reach a watershed with the possibility of the dollar plunging as low as 100 yen. Nosaka is a deputy economic news editor of The Yomiuri Shimbun.