Dollar's two-year slide is turning, say analysts
March 16, 2004
By Bloomberg
The dollar might be near the end of a two-year slide against the euro and British pound as evidence mounts that Europe's higher interest rates and strong currencies are eroding economic growth.
Only a third of the 62 investors, traders and strategists polled from Tokyo to New York on Friday advised buying euros for dollars. Less than a quarter advised purchasing the currencies of Britain and Australia, where central banks have increased rates twice since October.
Jonathan Clark, a vice-chairman of New York-based FX Concepts, said: "The dollar will be relatively strong." Money would "come home" as people quit higher-yielding currencies. "All the risky trades are in trouble," he said. "The higher the interest rates, the higher the risk."
The euro was trading at $1.2252 in London early yesterday, after gaining 1.2 percent last week. Its month-long rally is the longest in two years.
The dollar surged more than 2 percent against the pound and Australian dollar last week.
Minoru Shioiri, the senior manager in Tokyo of treasury and foreign exchange at Mitsubishi Securities, part of Japan's third-biggest lender, said: "The dollar's slide in the past two years is just beginning to turn."
UK manufacturing in January fell short of economists' forecasts as the pound's 26 percent rally in the past two years contributed to a 9 percent slide in exports, the most in a year and a half.
German economic institutes IfW and DIW, whose estimates are used by the country's finance ministry, cut growth forecasts for the euro region's economy last week. Ifw said the region would expand 1.7 percent this year, from 1.9 percent previously.
The euro has gained 39 percent in the past two years.
The euro extended its decline on Friday after European Central Bank (ECB) council member Ernst Welteke told reporters in Oberstdorf, Germany, that policy makers "cannot be sure that we can get a decent recovery this year".
Edward George, who retired as Bank of England governor last year, called on the ECB to reduce its benchmark rate from 2 percent, twice the level of the US Federal Reserve, the London-based Times reported on Saturday.
Australia's dollar, the best-performing currency last year, fell 3.5 percent last week as Australia added jobs at the slowest pace in seven months in February. The figures spurred speculation that Australia's central bank would not raise its 5.25 percent benchmark rate next month.
The Bank of England's key rate is 4 percent. The Fed's target has been at 1 percent since June.
Futures traders last week trimmed to the lowest in about five months the so-called short bets that the dollar would decline against the euro, the Commodity Futures Trading Commission said in Washington on Friday.
Patrizio Merciai, an adviser to the asset management board at Lombard Odier Darier Hentsch in Geneva, said: "You had an extreme reading of short dollar positions, which has been almost completely unwound. An even stronger euro from current levels would mean trouble for the European recovery."
In other trading, the Swiss franc might gain, participants in the currency survey indicated as Thursday's bombings in Madrid increased concerns about terrorist attacks on the US and its allies.
Twenty-six participants recommended buying the franc, 18 advised holding the currency and 15 said sell.
Spain's government said it had received a videotape purportedly from al-Qaeda, claiming it was behind the attack.
The bombs raised demand for the franc, a beneficiary in crisis times because of Switzerland's political neutrality. The franc climbed 1.7 percent against the dollar on Thursday.
The dollar's gains might be limited as a growing number of Wall Street's bond traders expect the Fed to keep its target rate at a four-decade low until next year.
A Bloomberg poll last week showed that economists at 10 of the 23 primary US government securities dealers, which trade with the central bank, predicted no change this year.
Scott Pardee, an economics professor at Middlebury College in Vermont who managed currency operations at the New York Fed from 1975 to 1981, said: "We're still sitting here with these very low interest rates. The dollar's under a cloud."
Futures contracts show traders have pushed back the expected timing for a Fed rate increase. December Eurodollar futures, a forecast for a three-month lending rate that averaged 23 basis points higher than the Fed's target over the past 10 years, yielded 1.57 percent on Friday from 1.73 percent two weeks ago.
Michael Goosay of Prudential Investments in Newark said the dollar had another bout of weakness ahead and might reach $1.28 against the euro this year.
Warren Buffett, the chairman of Berkshire Hathaway, said in a letter to shareholders earlier this month that he had invested $12 billion (R80.9 billion) since 2002 in bets that the dollar would weaken.
After the yen rose 1 percent last week to ´110.86 to the dollar, halting a three-week decline, 56 percent of survey participants advised holding the yen, double the number from a week earlier.
The yen gained after the ministry of finance said overseas investors bought more Japanese shares in the week to March 5 than in any other week in at least three years.
The Nikkei 225 stock average has gained 4.55 percent this year, compared with a 0.8 percent gain in the Standard & Poor's 500 index. The Dow Jones industrial average and Nasdaq composite index have both fallen this year.
The following survey, taken on Friday, gauges demand for five currencies against the dollar.
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