October 25, 2004
By Steve Johnson in London
Financial Times
The dollar fell to fresh lows in European morning trade on Monday as another jump in oil prices added to fears that the US economy will not grow fast enough to attract sufficient capital inflows.
With the US trade deficit having ballooned to $600bn a year, the US needs to attract portfolio inflows of at least as much to avoid further weakening of the dollar. If high oil prices slow growth, this process may become harder still.
Rising oil prices also engendered an atmosphere of risk aversion across all asset classes, with equities marked sharply lower, benefiting lower risk currencies such as the Swiss franc and euro.
The dollar’s slide against the euro was further fuelled by an unexpected uptick in Germay’s influential Ifo business sentiment survey to 95.3 in October, from 95.2, confounding expectations of a decrease. Retailing and construction led the move higher.
As a result the euro rose to a fresh eight-month high of $1.2817 against the dollar, a rise of 1.5c since Friday’s close, and approaching February’s seven-year high of $1.2930.
The dollar’s renewed slide was also fed by the breaching of some key technical support levels, encouraging momentum-driven investors to short the dollar still further. The dollar fell through its February low of SFr1.2035 against the Swiss franc to sit at an eight-year low of SFr1.1946, a fall of 1.5 centimes since Friday’s close.
The greenback also breached key technical levels against the yen in the process of tumbling to a six-month low of Y106.41.
The dollar also fell 1.5c to a two-month low of $1.8437 against sterling and 0.6c to a five-month low of $0.7494 against the Australian dollar, the latter helped by Australian producer prices rising at their fastest rate in three years.
“The deterioration in [dollar] confidence has many origins,” said Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi. “The decline in 10-year yields in the US bond market is sapping foreign investor demand for US bonds.
“Secondly, the comments from Federal Reserve officials over the last month or so linking the fate of the dollar to the worsening current account deficit has undermined investor confidence. Finally, there is a growing belief that the eurozone authorities are privately content to see the euro appreciating in order to offset the rising price of oil and other commodities.”
Despite further dollar weakness, there were still no signs of intervention by the Japanese authorities to weaken the yen on Monday, with Hans Redeker, global head of FX strategy at BNP Paribas, arguing that recent comments by government ministers indicate greater comfort with yen strength than in the first quarter of the year, when Japan was actively intervening.
However, the Russian central bank was said to be intervening to cap the dollar’s fall at Rbs28.86 to the dollar.
The Swiss franc, regarded as a safe haven currency in times of economic uncertainty, made gains across the board, firming to SFr2.203 against sterling, its strongest level this year, with the pound suffering from the release of yet more soft housing market data, this time courtesy of Hometrack, which reported a 0.6 per cent slide in prices in October. The Swissie also rose to Y89.03 against the yen and SFr1.5317 versus the euro.
http://news.ft.com/cms/s/327401c4-266f-11d9-b078-00000e2511c8.html