Steve Quayle News Alerts

Jan. 5, 2003

(Bloomberg) -- The dollar fell to a record against the euro and the lowest in more than three years versus the yen in New York after Federal Reserve Governor Ben S. Bernanke said the risk of a dollar crisis is ``quite low.''

``Looking at movements of the dollar against a single currency can be misleading about overall trends,'' he said in a speech to the American Economic Association in San Diego, referring to the currency's slide against the euro. The dollar weakened against the yen even as Japan sold its own currency.

The comments add to speculation the Fed will keep its target interest rate at a four-decade low of 1 percent, half that of the European Central Bank, well into this year. The dollar weakened to $1.2655 per euro at 8:16 a.m. in New York, according to EBS, from $1.2586 late Friday, after sinking to $1.2697. Versus the yen, the dollar fell to 106.29 from 107.07.

``Bernanke's comments are a green light for further dollar weakness,'' said Shahab Jalinoos, senior currency strategist at ABN Amro Holding NV in London. ``If the Fed isn't concerned about the dollar's fall, the Treasury won't be worried either.''

The dollar may weaken to $1.30 per euro this month, said Jalinoos. The yen advanced to the highest since September 2000 in London before the Bank of Japan sold the currency, according to a trader who deals with the central bank. The BOJ also sold yen in Tokyo earlier today, traders in the Japanese capital said.

``We will keep a close watch on the market to ensure there won't be excessive fluctuations,'' Zembei Mizoguchi, vice finance minister for international affairs, told reporters in Tokyo. ``We will take action as needed.''

Interest Rates

Demand for the dollar has waned in the past year as interest rates in the U.S. stayed lower than in Europe, discouraging some international investors from buying government debt sold to finance a record U.S. budget deficit.

The yield on the 1 7/8 percent U.S. Treasury note maturing in December 2005 was 1.92 percent, compared with 2.59 percent for the German note of similar maturity.

``The Fed will keep rates on hold for at least the first three quarters,'' said Kurt Magnus, head of foreign-exchange sales at Westpac Banking Corp. in London.

The dollar's decline, which makes overseas goods more expensive for Americans to buy, should not raise inflation expectations because imports have only a ``modest'' weight in the goods and services purchased by consumers, Bernanke said.

The European Union suggested it is unconcerned. ``There is no new position,'' said Gerassimos Thomas, a spokesman for EU Monetary Commissioner Pedro Solbes. ``We want a stable and strong euro.''

`Happy With Decline'

Judging the dollar's strength or weakness solely against the euro may also be misleading because its value against the currencies of major trading partners is about 7 percent above its average in the 1990s and 17 percent above the low it reached in 1995, Bernanke said.

``It reaffirms the view the market has that U.S. policy makers are happy with the decline,'' Simon Flint, a market strategist in Singapore at Bank of America Corp., said in a televised interview with Bloomberg News. ``They're not going to stand in the way of further depreciation.''

Gold prices rose to their highest in almost 13 years in London as the dollar's slide boosted the metal's appeal as a store of value. The U.S. Dollar Index, which tracks the dollar against a basket of six major currencies, fell to 86.22 from 86.92. The index dropped 15 percent last year.

Bush Untroubled

The dollar's decline may boost sales and manufacturing jobs as U.S. President George W. Bush seeks reelection this year. U.S. exchange rate policy is set by the administration rather than the central bank.

Employers in the U.S. probably added 148,000 workers last month, according to the median forecast of economists surveyed by Bloomberg News in advance of a government report on Friday. Fifty- seven thousand jobs were added in November, about a third of the expected growth. Another disappointing figure may see the euro gain to $1.30 by the middle of the month, Jalinoos said.

U.S. Treasury Secretary John Snow told Bloomberg News last month the currency's drop had been ``orderly.'' While he and Bush regularly endorse a ``strong dollar'' they say they want markets, not governments, to set exchange rates.

``The depth of international financial markets and the integration of global financial markets means that the risk of a dollar crisis is quite low -- not zero -- but quite low,'' Bernanke said during a panel discussion at the American Economics Association meeting.

Japanese Selling

Compared with the euro's gain against the dollar last year, the yen's rise versus the U.S. currency was smaller as Japan spent more than 20 trillion yen ($187.2 billion) to stem gains that threaten an export-led recovery.

``I would characterize the intervention today as very aggressive, rivaling anything we saw in any one day last year,'' Paul Chertkow, head of global currency research at Bank of Tokyo Mitsubishi in London, said in a televised interview with Bloomberg News after the yen sales in Tokyo.

The stronger yen risks eroding demand for Japanese exports. The world's second-largest economy will expand 1.8 percent in the year starting April 1 as companies increase spending and exports rise, the government said on Dec. 19.

Toshiba Corp., the world's third-largest chipmaker, predicted the yen's exchange rate would average 115 in the second half of the fiscal year that ends March 31. Nissan Motor Co. forecast a rate of 110.

More than 70 percent of 32 strategists, traders and investors polled last week from New York to Tokyo advised buying or holding the euro versus the dollar. Almost 90 percent favored buying or holding the yen.
Last Updated: January 5, 2004 08:26 EST

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