Dollar Falls on Concern Investment Will Decline After Bombings

Nov. 20, 2003

(Bloomberg) -- The dollar fell against the yen and euro in New York trading after a series of explosions in Istanbul heightened concern about escalating terrorist violence against the U.S. and its allies.

A decline in the demand for the dollar sent it lower versus 13 of the 16 major currencies tracked by Bloomberg, including the Swiss franc and the British pound. The explosions killed at least 26 people and injured as many as 450, Turkish Interior Minister Abdulkadir Aksu said. The blasts damaged the British consulate and the offices of London-based HSBC Holdings Plc.

"A terrorist attack is a shock to the financial system,'' said Jason Bonanca, a strategist at Credit Suisse First Boston in New York. ``Large debtor countries like the U.S., which is the world's largest debtor, see their currencies fall in such an environment. It is because of intense risk aversion.''

As of 12:52 p.m., the dollar fell to 108.90 yen from 109.32. It was at $1.1896 per euro from $1.1878 late yesterday. The Swiss franc, which is viewed as a haven in times of crisis, strengthened to 1.3028 per dollar from 1.3047. The pound rose to $1.7026 from $1.6973. Treasury bonds and gold rose.

Turkey, the only majority-Muslim country in the North Atlantic Treaty Organization, offered to send peacekeeping troops to neighboring Iraq and wants to join the European Union. Its constitution requires the separation of the state from religious institutions.

U.K. Foreign Secretary Jack Straw said today's attacks had ``all the hallmarks'' of past attacks orchestrated by the al- Qaeda terrorist network.

False Alarm

The dollar briefly weakened to $1.1969 as the White House was evacuated just before 9:30 a.m. after an airplane came within five miles of the executive mansion. The pilot was contacted and the situation resolved.

Concern that more terrorist attacks and a prolonged conflict in Iraq will weigh on business and consumer confidence, limiting spending by both parties, is hurting the dollar, analysts said. The dollar lost 6.6 percent against the euro in the first five months of the, during the build up and aftermath of the war in Iraq. It is down 12 percent this year.

``The thinking is that any type of terrorist activity will negatively impact U.S. growth, leading to lower returns on U.S. assets,'' said Alejandro Urbina, a currency strategist in Chicago at Bank One Corp. who used to work at the Federal Reserve Bank of Chicago.

Urbina said the dollar would weaken past $1.1950 by the end of this week.

Leading Indicators

The dollar fell even after the U.S. Labor Department said claims for state unemployment benefits fell last week to a level that is close to the lowest in three years. The less-volatile four-week average dropped to the lowest since February 2001, suggesting a growing reluctance among U.S. companies to fire workers as the economy strengthens.

The index of leading U.S. economic indicators rose in October for the fifth time in the last six months, suggesting the economy will continue to expand through early next year.

``The focus this morning is on the blasts in Turkey,'' said Bank One's Urbina.

The dollar remained lower after the Federal Reserve Bank of Philadelphia said its index of regional manufacturing fell to 25.9 in November from 28 in the previously month. Economists surveyed by Bloomberg forecast a decline to 25. Readings greater than zero indicate expansion. The October index was the highest since July 1996.

Europe, Japan

Comments by French Finance Minister Francis Mer, which suggested he isn't concerned about the 12 percent decline in the dollar's value against the euro this year, exacerbated the currency's decline today, analysts said. Mer said France's economy, Europe's third-largest, is growing fast enough to make up for a drop in exports caused by the euro's advance.

``The issue of the dollar being too weak is of secondary importance compared with the economic recovery,'' Mer said in an interview with French television channel LCI.

Germany's biggest increase in exports in almost three years and a recovery in French consumer spending helped the two largest Euro-region economies grow at a 0.4 percent pace in the third quarter, the fast rate in five quarters. It contracted in the previous quarter.

Japan's Cabinet Office today raised its evaluation of the economy as a rebound in the U.S., Europe and Asia spurs exports and business spending, helping sustain seven quarters of growth in the world's second-biggest economy, the government said in its monthly economic assessment released in Tokyo.

`Stronger Yen'

``The trend remains for a stronger yen, based on positive economic data, equity inflows and a current-account surplus,'' said Michael Woolfolk, a senior currency strategist at the Bank of New York, the third-largest New York-based bank. ``The only thing putting a break in the move is the Bank of Japan.''

Woolfolk said the yen would strengthen to 107.5 per dollar in coming days.

Japan's central bank sold yen yesterday after it reached 107.56 per dollar, the strongest since November 2000, said a currency trader who deals with the BOJ and spoke on condition he not be identified.

Nikkei English News reported the Bank of Japan sold 1 trillion yen ($9.15 billion, without saying where it got theinformation. An official at the Ministry of Finance, which instructs the BOJ to buy and sell, declined to comment.

China Policy

The dollar may weaken further. China, the third-biggest international investor in Treasuries, may sell some of its holdings following the U.S. move yesterday to restrict imports of Chinese textiles, the Royal Bank of Canada said in a report.

Fed Chairman Alan Greenspan today said protectionist policies may destabilize the world economy and result in greater disruption of global financial markets as imbalances such as the U.S. current account deficit correct.

``The costs of any new such protectionist initiatives, in the context of wide current account imbalances, could significantly erode the flexibility of the global economy,'' Greenspan said in the text of a speech to an annual Monetary Conference sponsored by the Cato Institute and The Economist magazine. ``It is imperative that creeping protectionism be thwarted and reversed.''

A decline in the amount of U.S. securities bought by overseas investors would make it difficult for the U.S. to finance the gap in its current account, the broadest measure of trade and investment. In the second quarter, the deficit registered at a record $138.7 billion.

The current account deficit will put ``continued pressure on the dollar'' which will ``at some point'' help the U.S. economy, said John Thain, president and chief operating officer of Goldman Sachs Group Inc, the third biggest U.S securities firm by capital. ``There's no question that the dollar is going to continue to decline versus the euro,'' he said.
Last Updated: November 20, 2003 12:54 EST

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