October 20, 2004
Bloomberg
The dollar fell below $1.26 per euro for the first time since February as concern about slowing international investment in the U.S. pushed a widely watched dollar gauge past a key technical level.
The Dollar Index, a basket of six currencies, fell below 87 yesterday for the first time in eight months and weakened again today. The trade gap, exports minus imports, widened in August to the second largest ever while foreign investors slowed their purchases of U.S. financial assets, reports this month showed.
``Concern about the trade deficit and capital inflows are back to the forefront of our outlook for the dollar,'' said Daniel Katzive, a currency strategist in Stamford, Connecticut, at UBS AG, which cut its forecast for the dollar today. ``Since we broke out of a six-month range there might be even less incentive to buy dollars back this week.''
Against the euro, the dollar weakened to $1.2609 as of 9:05 a.m. in New York from $1.2512 late yesterday. The U.S. currency traded at 108.25 yen from 108.37. UBS, the world's biggest currency trader, lowered its one-month forecast for the dollar to $1.27 per euro from $1.21 and its three-month projection to $1.29 from $1.25.
The Dollar Index, at 86.46, averages the exchange rates between the dollar and six other currencies, with the euro accounting for 58 percent. The index also comprises the pound, yen, Canadian dollar, Swiss franc and Swedish krona.
The dollar is down 1.5 percent versus the euro so far this month as U.S. job growth and consumer optimism ebbed and manufacturing in New York State slowed.
`Strong Signal'
``Sentiment is now starting to turn negative for the dollar,'' said Ian Stannard, a currency strategist at BNP Paribas SA in London. The drop in the Dollar Index below 87 ``is a fairly strong signal that the current dollar weakness is broad-based.''
The U.S. currency dropped as job growth trailed median forecasts in each of the past four months. The economy added 96,000 jobs in September, less than the 148,000 jobs economists predicted, government figures showed earlier this month.
Last week, reports showed the Federal Reserve Bank of New York's Empire State manufacturing index and the University of Michigan's gauge of consumer sentiment fell more than expected this month. Foreign investors added to their holdings of U.S. securities in August at the slowest pace since last October, the Treasury Department said on Oct 18.
``We have broken through the range-trading and this gives it extra momentum,'' said Carsten Fritsch, a currency strategist at Commerzbank AG in Frankfurt. ``The mood is negative.''
Yen and Nikkei
The dollar's decline accelerated after it reached $1.2560, triggering automatic orders to sell the U.S. currency, said Kurt Magnus, head of foreign-exchange sales at Westpac Banking Corp. in London. Traders place such orders to limit losses in case their bets go the wrong way.
``The important thing is the U.S. Dollar Index,'' said Magnus. ``When the index broke 87.10 and then 86.80 that was the trigger for a general sell-off of the dollar.''
Earlier today, the yen weakened on concern the currency's advance to a three-month high against the dollar will slow an export-led recovery in the Japanese economy.
The rally in the yen helped push the Nikkei 225 Stock Average to its biggest drop in two months, led by exporters such as Honda Motor Co., raising concern global investors will reduce share purchases. A Merrill Lynch & Co. investor survey yesterday showed Japan's stock market slipped from being the best market for investment for the first month in eight.
``There's no way we will see any immediate surge in overseas appetite for Japanese shares,'' said Tomoko Fujii, currency strategist in Tokyo at Citigroup Inc. ``The yen will probably come under short-term pressure'' after yesterday's rally.
Japanese Exporters
Honda, Japan's third-largest automaker, which makes as much as 80 percent of its operating profit in the U.S., on July 29 raised its annual net income forecast 6.9 percent on a weaker yen. The company based its earnings outlook for the second quarter to September on an exchange rate of 108 yen to the dollar.
Large manufacturers forecast a yen rate of 106.98 in the first half of the financial year started April 1 and 106.12 in the second half, according to the latest Bank of Japan quarterly survey.
The Nikkei 225 dropped 1.7 percent and is down 9 percent in the past six months. Citigroup forecasts the Japanese currency weakening to 110 per dollar in a month.
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