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Dollar hovers on brink, but recovery in sight
08:53 a.m. Sep 11, 1998 Eastern
By Carolyn Cohn
LONDON, Sept 11 (Reuters) - The falling dollar is clinging to key chart points for support against the yen and mark, but there are still fundamental reasons to buy the U.S. currency, analysts said on Friday.
The dollar struck five-month lows against the yen, 16-month lows against the mark and 20-month lows against the Swiss franc on Friday, knocked by speculation about a cut in U.S. interest rates, talk of impeachment of U.S. President Bill Clinton and currency devaluations in Latin America.
Developments in Russia, global stock markets and among European economic and monetary union (EMU) candidates were adding to the currency turmoil, analysts said.
But a few weeks of scary times for the dollar are likely to be followed by recovery.
''The dollar is the global reserve currency, and a flight to quality with safe haven trades will benefit it,'' said Neil Parker, treasury economist at Royal Bank of Scotland.
The dollar looked vulnerable after falling through psychological support levels of 1.70 marks on Thursday, and 130 yen on Friday.
But technical analysts, who study price action on currency charts, were more concerned about sustained breaches of the 1.6750 marks and 128.50 yen support levels.
These are thrown up by trendlines drawn on the charts from 1995, tracking the rising dollar over that period.
Dollar/mark slipped briefly through that safety net on Friday, falling to 1.6680. But it recovered to 1.6870/75 by 1140 GMT.
Dollar/yen stopped short just above the crunch line, at a low of 129. It was trading at 130.78/88 at 1140 GMT.
''Markets are reversing these primary uptrends initiated in 1995,'' said Steve Merrigan, technical analyst at First Chicago.
Merrigan said breaks of previous support levels indicated further downside for the dollar. He saw it tackling 1.62 marks and 121.75 yen over the next couple of weeks.
But analysts saw a reversal in the dollar's fortunes by the beginning of October.
Interest rate futures markets have priced in a cut in the U.S. Federal funds rate, currently at 5.50 percent, at the next meeting of the U.S. Federal Open Market Committee on September 29.
U.S. interest rate cut expectations, fuelled after the Bank of Japan steered a key money market rate lower on Wednesday, have hit the dollar this week.
''The dollar is being undermined by the interest rate debate, not by fundamental factors,'' said Royal Bank's Parker.
But once a cut is out of the way, the U.S. currency will once more be able to rise, analysts said.
A major factor seen in dollar/yen's favour is the strength of the U.S. economy in comparison with Japan, which reported a larger-than-expected fall in second quarter gross domestic product (GDP) of 0.8 percent on Friday.
Repatriation of Japanese assets ahead of the fiscal half-year on September 30 has helped the Japanese currency put on nearly 20 yen against the dollar in the past month.
But that trend will quickly reverse, analysts said.
''Japanese life insurance companies have no option but to take their money elsewhere, as they are mandated to make 2.5 percent,'' said Cameron Crise, currency strategist at SBC Warburg Dillon Read.
Japanese bond yields are currently languishing below one percent.
Markets will also start to pay less attention to the specific impact on the U.S. currency of problems in neighbouring Latin America, analysts said.
The Mexican peso fell to record lows on Thursday, and Brazil raised interest rates in an effort to plug massive outflows from its financial markets.
But Latin America's woes were part of a worldwide crisis, and the dollar should not bear the brunt of them, analysts said.
''If you see real problems in South America, it will have global ramifications,'' said Parker. ''To try and localise the problem is a bit naive.''
Further market uncertainty was likely to be removed, once the Clinton sex-and-perjury scandal reached a conclusion, analysts said. Independent counsel Kenneth Starr's report on the White House scandal will be published later on Friday.
Fears of Clinton's impeachment have been used as excuses to sell the dollar. But analysts anticipate Clinton will escape that fate, with the political and economic repercussions of an impeachment too great.
''The last thing the world needs is the leader of its leading economy being handcuffed,'' said Crise.
((London newsroom +44 171 542 6320, uk.forex.news+reuters.com))
Copyright 1998 Reuters Limited. |
