Monday, November 29, 2004

Dollar Declines for Seventh Week Against Euro, Sets Record Low

Nov. 27 (Bloomberg) - The dollar fell for a seventh straight week against the euro, reaching a record low, amid speculation central banks of the major economies will tolerate the U.S. currency's decline.

Traders also sold dollars on concern foreign investors and central banks may reduce holdings of U.S. assets. Bank of England Chief Economist Charles Bean said international investors are unlikely to keep buying U.S. assets indefinitely, resulting in a ``possibly substantial'' drop in the dollar.

``The key is the lack of fear by the U.S. dollar bears of any intervention'' by central banks, said Enrico Caruso, chief trader at currency hedge fund Tempest Asset Management in Newport Beach, California. ``It seems the market is convinced we will test the $1.35 area before finding a pain threshold for the European Central Bank.''

Against the euro, the dollar lost 2.1 percent this week to $1.3297 at 5 p.m. in New York yesterday, according to electronic currency-dealing system EBS. It set a record low $1.3330 yesterday. The seven-week losing streak was its longest since January. The dollar fell 0.5 percent this week to 102.59 yen, dropping as low as 102.01 yesterday, the weakest since January 2000. It fell for a ninth straight week against the yen.

The U.S. currency fell to the record yesterday after China Business News reported Chinese central bank official Yu Yongding said his country had trimmed its holdings of U.S. Treasuries. He later denied making the statement.

Echoing Greenspan

Bean's comments to business leaders in Colchester, England, two days ago echoed those of Federal Reserve Chairman Alan Greenspan, who said at the European Banking Congress in Frankfurt on Nov. 19 that foreigners may tire of financing the record U.S. current-account deficit.

The U.K. holds $134.6 billion in U.S. Treasuries, according to the Treasury Department.

The Fed's holdings of Treasuries on behalf of foreign central banks and official institutions fell in the week ended Nov. 24 by $1.062 billion to $1.061 trillion. It was the first decline since the week ended Oct. 13.

``There's no reason to be brave right now'' and buy dollars, said Robert Sinche, head of currency strategy at Banc of America Securities LLC in New York. Given the ``tacit approval'' from policy makers that the dollar needs to drop, ``why would you get on the other side of it?''

Sinche projects a dollar drop to $1.35 per euro early next year. A weaker dollar has helped U.S. companies that sell products in Europe such as Gillette Co., which said the U.S. currency's drop boosted sales in the third quarter. The dollar has lost 32 percent against the euro since the start of 2002.

DaimlerChrysler

DaimlerChrysler AG, the world's fifth-largest carmaker, said the dollar's decline against the euro will reduce the earnings of the Mercedes-Benz luxury car division. European stocks fell yesterday on concern about a weaker dollar.

``We weren't prepared for the dollar to be at this level,'' Thomas Weber, the DaimlerChrysler management board member responsible for research, told journalists in Frankfurt this week. ``It will influence the results at Mercedes, and 2005 won't be an easy year.''

ECB President Jean-Claude Trichet yesterday said he doesn't welcome ``excessive'' currency moves.

``I want to reiterate my recent statement that excessive moves on foreign-exchange markets are unwelcome,'' Trichet said at a press conference after a seminar for Latin American central banks in Rio de Janeiro.

Chinese Selling Reported

Yu, a Chinese monetary policy committee member, said the news report about reducing holdings in Treasuries was ``distorted,'' in a statement on the Web site of the Institute of World Economics and Policies of the Chinese Academy of Social Sciences, where he is a director.

China, the second-largest foreign holder of U.S. government debt, reduced its holdings of U.S. Treasuries to $180 billion, China Business News said. The country's central bank declined to comment on the report. China's holdings of Treasuries rose to a record $174.4 billion at the end of September, according to the Treasury Department.

``The real risk is that the sharper and the quicker the dollar falls, that these investors pull out pretty quickly from U.S. markets,'' said Mitul Kotecha, global head of currency research in London at Calyon, the investment banking unit of Credit Agricole SA.

Chinese international reserve assets were a record $514.5 billion in September, accounting for about 15 percent of the world's total, excluding holdings of gold, according to data compiled by Bloomberg.

Russian Reserves

Russian central bank official Alexei Ulyukayev said this week that Russia may trim the share of dollars in its foreign- exchange reserves. Russian foreign currency and gold reserves totaled $113.1 billion in the week ended Nov. 12.

The central bank keeps about a third of its reserves in euros and the rest mainly in dollars, central bank Deputy Chairman Konstantin Korishchenko said in an interview on Nov. 3.

Japanese Finance Minister Sadakazu Tanigaki told reporters in Tokyo yesterday the currency market needs careful watching. Japan must act on any unusual moves, Tanigaki said.

The Bank of Japan, at the ministry's direction, sold a record 32.9 trillion yen ($320 billion) in the year ended March 31 to stem the currency's gain.

The gap in the U.S. current account, the broadest measure of trade, was a record $166.2 billion in the second quarter. A wider deficit means more dollars need to be converted into other currencies to pay for imports.

``The market has gone a little bit carried away'' with the dollar's slide, said Tania Kotsos, a currency strategist at RBC Capital Markets in London. Kotsos forecasts the dollar to gain to $1.30 per euro and trade at 103 yen at the end of the year.


Source: Bloomberg

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