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Dollar slide to push euro to new
highs
By Hussain Khan
TOKYO -
For the US dollar, this year started as 2003 ended - as
a continuous slide. This week, the yen hit a 40-month
high above the 106-level both in New York and Tokyo,
despite the fact that Japan has increased funds in its
new budget to fight the currency's appreciation against
the dollar. The euro, too, has been hitting new highs
after brief profit-taking recesses in some sessions. The
pressure of the dollar slide, resulting from huge US
deficits and the Bush administration policy of allowing
the slide so as to ease these deficits, coupled with the
fact that the yen and yuan are protected by the Japanese
and Chinese governments respectively, means there is no
alternative to the euro surging ever upward.
China, meanwhile, is studying a plan to peg the
yuan against a basket of 10 currencies instead of just
against dollar, and is hinting at a slight relaxation of
the dollar exchange rate - a modicum of good news for
Washington.
US policymakers have not shown any
interest in preventing the dollar slide. As Ben
Bernanke, one of the US Federal Reserve governors, put
it on Sunday night, the US central bank "has the luxury
of being patient". The risk of a dollar crisis is "low".
The market was quick to draw the conclusion that the US
central bank is not about to raise rates from their
45-year lows in the near future. Bernanke and his
colleagues argue that while the greenback has taken a
bath against the euro, its decline against a broader
"basket" of currencies is rather less marked. According
to them, the dollar has fallen less against the yen, for
example, because Japan has been intervening all the
time, while China has its currency pegged. It is the
euro that is taking the strain.
As regards euro
highs, there is no European government interested in
preventing its further appreciation. The euro hit a new
lifetime high, rising to within a whisker of $1.27 at
the beginning of the week. Currency analysts said the
dollar's weakness was dominating the markets to the
exclusion of other factors.
"There do not appear
to be any signs of an early turn around in sentiment,"
Paul Bednarczyk, currencies strategist at 4Cast economic
consultancy, said last week. "We expect there will be
some queue-jumping to get some profits booked ahead of
$1.25, although beyond the immediate near term, $1.25
should prove little more than a psychological hurdle."
The euro has already crossed that psychological barrier
and has hit $1.27.
Neither are European Union
officials showing any interest in curtailing the euro's
rise. Pascal Lamy, the EU's trade commissioner, said the
euro's current value is "not yet a worry". He sounded a
slight note of caution, however, adding that it is
essential that currencies do not move too sharply.
On Monday, the US dollar also hit a seven-year
low against the Swiss franc and a 10-year low against
the Canadian dollar.
Third-quarter US gross
domestic product (GDP) growth was left unrevised at 8.2
percent quarter-on-quarter. The University of Michigan
measured consumer confidence roughly in line at 92.6. In
Europe, the euro zone current-account surplus narrowed
in October to 8.1 billion euros from 9.6 billion in
September, but portfolio inflows surged, offsetting a
new outflow of direct investment. This will be crucial
in determining the direction of euro/dollar this year.
"Extreme positioning and the potential for long-term
interest rates to shift back in favor of the US creates
the potential for a euro/dollar retracement over the
coming months," said Steven Saywell, currencies
strategist at Citigroup.
With few economic data
to influence markets, the dollar's continuing decline
reflects persistent worries about the US budget and
trade deficits, even as Europe's economic recovery lags
the upturn in the United States. The probability that
the euro will break through the $1.30 mark for the first
time is increasing. The euro is destined to appreciate
to new highs as long as the present economic conditions
continue in the US, Europe, Japan and China.
Sterling to appreciate further against
dollar
While the dollar weakness was continuously
pushing the pound sterling upward, recently released UK
economic data strengthened the trend. Sterling further
appreciated against the dollar after an upward revision
to quarterly growth in the United Kingdom. The final
reading saw third-quarter GDP growth amended to 0.8
percent quarter-on-quarter, from an initial estimate of
0.7 percent, putting annualized growth at 2.1 percent.
"The third quarter is really old news and the key to
timing the next rate move will be the strength of
activity in the fourth quarter of the year," said Mitul
Kotecha, economist at Credit Agricole Indosuez. The
pound gained ground on the dollar, however, hitting $1.8
on Monday.
The last time the dollar was so cheap
was in 1992 when the US recession weakened the greenback
and drove sterling up to more than $2 - the level
beloved of math-phobic vacationers. Then, the pound's
strength was short-lived as Britain's sudden departure
from the Exchange Rate Mechanism (ERM) wiped 28 percent
off its value and pushed it back to $1.44 in a matter of
months. This time, the dollar is predicted to weaken
steadily next year and sterling to keep on rising -
unless there is another economic shock like the ERM
crisis.
There have been fears that the
relatively sharp shift in the exchange rate would hurt
the UK economy, but some analysts have called for a
sense of perspective. "I remember the Waldorf in New
York offered to exchange pounds at $0.98 for me in the
1980s and I saw Americans forced to buy them at $2.17 in
1992," said Nick Parsons, the seasoned head of currency
strategy at Commerzbank. "The current level doesn't
really look that extreme to me and I'm not getting any
sense this is about to be reversed."
Japan to
double amount for exchange intervention
The Bank
of Japan (BOJ), acting on behalf of the Japanese Finance
Ministry, spent a record 20.06 trillion yen during 2003
on market interventions, nearly three times the previous
record of 7.64 trillion yen logged in 1999, to shore up
the dollar in a bid to protect Japanese exporters. And
the Finance Ministry said on the weekend that it would
double the amount it could borrow for intervention,
giving it 100 trillion yen for this fiscal year (ending
March) and 140 trillion yen for the next fiscal year.
From now until the end of the next fiscal year, the BOJ
will have more than 160 trillion yen to spend on
interventions.
Finance Minister Sadakazu
Tanigaki said the move was designed to dispel
speculation that the Japanese authorities had little
room left for intervention. "Exchange rates should be
stable and reflect fundamentals," he said. "We will act
in a timely and appropriate manner against any moves to
the contrary. The new amount should be enough to prevent
speculation that we are running out of room for such
action." Currency strategists said this meant there is
in effect no limit on how much Japan could spend trying
to hold down the yen, and it could be expected to
continue to intervene as readily as it did last year.
Ray Attrill of 4Cast said the move was "a
surefire sign" that Japan would resist any further
appreciation in the yen. "The dollar's depreciation will
continue to drag the yen higher but by raising the
ceiling, Japan will be able to limit the pace at which
it rises," he said. Tony Norfield of ABN Amro in London
agreed: "This is a huge amount, but it is there to
manage the decline in the dollar and will give the
market the view that the Japanese government won't let
it drop dramatically."
Despite the massive
interventions of 2003, the yen nevertheless appreciated
by about 10 percent against the dollar. The Finance
Ministry's latest announcement is an indication the
government will continue to try to protect Japanese
exporters, who have fueled eight quarters of growth.
With the economic recovery in mind, Japan's cabinet
approved a marginally bigger budget for next year as it
tried to balance the need to close the budget deficit
with a desire not to stifle economic growth through
fiscal tightening. The cabinet approved an 82.1 trillion
yen budget for the year beginning in April, a 0.4
percent increase from 2003. The new budget features cuts
in defense, overseas aid and public-works spending but
requires record bond issuance because of higher
social-welfare and debt-servicing costs.
A rapid
escalation in Japan's already-record levels of
intervention would further shift the burden of the
dollar's weakness on to other major currencies,
particularly the euro. It would also run contrary to the
Group of Seven industrialized countries' call in
September for more flexible exchange rates.
China studies yuan peg changes
China
is studying the possibility of linking the exchange rate
for its currency to a group of 10 foreign currencies,
dropping its politically volatile direct tie to the US
dollar, a government newspaper said on Monday. Switching
to a group of currencies instead of a direct dollar tie
would reflect China's fast-growing importance in the
global market and reduce the influence of the US
currency on exchange rates. Chinese officials are
reportedly also considering steps to ease restrictions
that keep money from flowing out of their economy,
reducing pressure to raise the value of the yuan.
Chinese state media reported that personal
foreign-exchange savings in domestic banks had fallen in
recent months as revaluation speculation prompted savers
to shift their funds into yuan. Chinese residents'
foreign-exchange savings fell to $86.1 billion at the
end of November, from $86.8 billion at the end of
October.
The yuan's exchange rate has been fixed
at about 8.28 to the dollar since 1994. Premier Wen
Jiabao and other Chinese leaders say they plan
eventually to let the yuan trade freely in world
markets, but they have responded to US demands to do so
immediately by saying such a step would be too risky for
the country's banking and financial industries. US
officials say the current fixed exchange rate is too
low, driving up China's trade surplus with the United
States - expected to top $120 billion this year - by
making its exports unfairly cheap.
China's
central bank has adjusted its description of its policy
on the exchange rate, a move that may hint at plans to
allow greater movement against the US dollar. The
quarterly meeting of the People's Bank of China's
monetary policy committee reaffirmed its commitment to
"maintain the basic stability of the renminbi [yuan]
exchange rate". However, the committee added that
currency stability should involve a "reasonable and
proportionate level" - a caveat not included in its
previous quarterly statement.
The tweak to the
way the policy is phrased may fuel hopes for at least a
gradual revaluation of the yuan against the dollar.
However, there is likely to be strong opposition within
the government to any dramatic move that might undermine
the export sector - a key driver of economic growth and
a magnet for foreign investment. Beijing has sought to
lessen the monetary pressure caused by soaring export
income by easing curbs on outward capital flows.
(Copyright 2003 Asia Times Online Ltd. All
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