Dollar Falls on Speculation Fed Will Leave Rates Unchanged

May 6, 2003
By Monee Fields-White

New York (Bloomberg) -- The dollar fell against the euro and yen for a fifth day in six as traders said a Federal Reserve decision today to leave interest rates at a 41-year low will underscore how weak the U.S. economy is.

Almost all of the dollar's 7.5 percent decline against the euro this year, which sent it to a four-year low, has come in the past six weeks. Analysts expect the European Central Bank to leave its benchmark rate at a meeting Thursday at 2.5 percent, double the Fed's 1.25 percent rate. That differential has slowed investment in Treasuries, taking away a source of funding of the U.S.'s $1.5 billion daily current account gap.

``The big picture for the dollar remains quite bearish,'' said Daniel Katzive, a currency strategist at UBS Warburg LLC, the second-biggest trader in the $1.2 trillion-a-day currency market. The decline ``reflects the difficulty of financing a large current account deficit when U.S. yields are so low and foreign demand for U.S. equities is questionable.''

The dollar slid to $1.1356 per euro at noon in New York, its weakest since February 1999, from $1.1292 yesterday. Katzive forecasts the dollar will weaken to $1.20 per euro by yearend. The dollar fell to 117.93 yen from 118.54.

The U.S. currency's recent slide brings its losses in the past 12 months to 19 percent as evidence has mounted that the world's biggest economy is slumping. The unemployment rate rose to 6 percent, matching an eight-year high, and manufacturing contracted the most since October 2001 in April, reports last week showed.

Bond Returns

All but three of the 79 economists surveyed by Bloomberg News predict Fed policy makers will keep the target unchanged today. They are slated to announce a decision at 2:15 p.m. New York time.

The rate differential makes it hard for the U.S. to attract the $1.5 billion a day in foreign capital needed to offset the current account deficit, which widened to a record $136.9 billion in the fourth quarter of 2002.

``There is less money flowing into the U.S. and more money flowing out,'' said David Durrant, chief currency strategist for Bank Julius Baer, which manages about $76 billion.

A European investor buying U.S. Treasuries maturing in more than a year would have lost 9.21 percent in the past 12 months after converting the investment back into euros. An investment in similarly dated European bonds would have returned 10.74 percent over the same period. The German 5 percent bund maturing March 2012 currently yields 4.322 percent while the U.S. 3 7/8 percent Treasury note due February 2013 yields 3.88 percent.

Investors funneled $418 million out of the U.S. market in the week ended May 2, according to UBS Warburg weekly report. That's the fourth week in the past five net investment outflows rose. This ``is bad news fro the U.S. dollar,'' the report said.

Gillette, Altana

The euro's rise against the dollar has helped boost some U.S. companies' sales in the 12 nations sharing the currency.

Gillette Co., the world's largest razor makers, said the euro's gain pushed first-quarter sales up 14 percent, more than double analysts' forecasts. Sales overseas accounted for more than half of the company's business last year.

Some European companies are being hurt by the euro's surge.

Nikolaus Schweickart, chief executive officer of Altana AG, Germany's fifth-biggest drugmaker, said the euro's surge cut the company's first-quarter sales growth in half.

``I cannot recall the currency ever having had such a material effect on results,'' Schweikart said. Altana said today first-quarter profit rose 28 percent.

The euro's exchange rate ``is no reason for concern,'' ECB member Ernst Welteke told reporters in Munich today. Competitiveness of German industry is still above its ``long-term average,'' he said.

Jobless Claims

U.S. reports this week may also point to a weak expansion. The government will probably report filings for state unemployment benefits in the week ended Saturday held above 400,000 for a 12th week, according to the median forecast in a Bloomberg News survey. Claims of more than 400,000 indicate the economy is too weak to bolster job growth, economists say.

The U.S. economy grew at a 1.6 percent annual rate in the first three months of this year, while consumer spending matched the weakest rate since the first quarter of 1993. For the year, the economy may expand 2.4 percent, the same as last year, the latest Blue Chip Indicators Survey showed last month.

``The international investment community, including overseas central banks and investors, just doesn't see the U.S. economy back on solid footing,'' said Charles Spence, director of currency sales at ING Financial Markets LLC. He expects the dollar to weaken to $1.1460 per euro.

http://quote.bloomberg.com/apps/news?pid=10000006&sid=asZRbwSCkto
E&refer=home