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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (26438)	3/28/2005 1:09:18 PM
From: RealMuLan	Respond to of 116555

Dollar May Halt 3-Year Drop, Former MOF Official Says (Update1) March 28 (Bloomberg) -- The dollar may gain against the yen in 2005, snapping a three-year drop, as rising interest rates increase the appeal of U.S. assets, said Makoto Utsumi, a former top currency official at Japan's Ministry of Finance. The Fed on March 22 raised borrowing costs for a seventh time since June by a quarter percentage point to 2.75 percent and said ``pressures on inflation have picked up,'' a signal rates may rise further. ``Support for the dollar from rising U.S. interest rates cannot be ignored,'' Utsumi, now president of Japan Credit Rating Agency, said in an interview from his office in Tokyo. ``I see more chances the balance shifts in favor of the dollar.'' The U.S. currency today rose to a four-month high of 106.99, extending this year's rally to 4.2 percent. Utsumi, who helmed Japan's currency policy between 1989 and 1991, said the dollar may trade closer to the upper end of his forecast range of 100 to 110 this year. The Fed will lift the fed funds rate to 3.75 percent by Dec. 31, according to the median forecast of 66 economists polled by Bloomberg this month. Eurodollar futures contracts show traders are expecting the rate to be at least 4 percent by then. `Attract Money' The Fed's comments on inflation spurred speculation the central bank will make its biggest rate increase in five years in 2005. The Fed last raised its key rate by half a percentage point in May 2000. ``The Fed is going to accelerate its tightening,'' said Toru Umemoto, a market analyst in Tokyo at Keio University's Global Security Research Center, an organization headed by Eisuke Sakakibara, Japan's former vice finance minister. ``The dollar will appreciate.'' The European Central Bank has kept its key rate at 2 percent since 2003. Japan has held interest rates near zero since 2001. Bank of Japan Governor Toshihiko Fukui said on March 18 the bank is committed to keeping its zero-interest policy until core consumer prices stop falling. A week later, a government report showed prices had their biggest drop in 20 months in February. ``The U.S. is a couple of steps ahead of the euro-zone and Japan in seeing economic performance and interest rates,'' Utsumi said. ``That's helping attract money.'' Changing Focus The U.S. currency dropped 4.3 percent last year, taking its three-year decline versus the yen to 22 percent, on concern the U.S. may fail to entice enough funds from overseas to offset a record shortfall in the current account. Utsumi said rising U.S. interest rates have helped divert people's attention from a widening deficit for the moment. ``The focus of the market changes over time, be it the current account balance or economic performance and interest rates,'' Utsumi said, adding a widening deficit still may undermine the dollar's performance. The gap in the current account, a gauge of trade, services and investment, rose to a record $187.9 billion in the fourth quarter, from $165.9 billion in the prior three months. The U.S. needs to receive more than $2 billion a day in investment from abroad to compensate for the deficit, according to Bloomberg calculations. A government report March 15 showed demand among international investors for U.S. assets rose in January to the highest in almost two years. The biggest increase was in purchases of U.S. Treasury securities. Foreigners bought a net $91.5 billion of U.S. bonds and stocks, up from a revised $60.7 billion in December, the Treasury Department said. bloomberg.com