December 6,2004
By Christina Fincher
Yahoo Finance
LONDON (Reuters) - The dollar teetered above last week's record low against the euro and five-year low versus the yen on Monday as traders wondered for how long Europe and Japan would tolerate the greenback's slide.
Sabre-rattling from Japan got louder as a host of officials voiced concern over the dollar's decline and vice finance minister Koichi Hosokawa promised the country would take "bold action" if needed.
Euro zone finance ministers are expected to discuss the dollar's fall at a meeting later on Monday, although the head of the European Central Bank Jean-Claude Trichet made no mention of currencies during a speech in Paris.
"The strength of the dollar's downtrend is such that it is hard to bet against it," said Lee Ferridge, head of global market strategy at Rabobank. "My feeling is rhetoric alone will not stop the dollar's fall and we could see a test of $1.35 when New York trade gets into full swing."
The dollar stood at $1.3450 against the euro at 1230 GMT, having fallen to around $1.3460 on Friday after the publication of a disappointing U.S. payrolls report. The greenback traded at 102.32 yen, having fallen on Friday to around 101.83 yen, its lowest since January 2000.
Data on Friday showed the U.S. economy generated only 112,000 new jobs in November, little more than half the consensus forecast.
STRUCTURAL CONCERNS
The dollar has suffered incessant selling in the past two months on renewed worries about the giant U.S. trade and budget deficits and a widespread belief a weaker dollar is needed -- and perhaps wanted by Washington -- to correct them.
"The payrolls figures suggest the cyclical reasons for buying the dollar are not enough to outweigh the structural reasons for selling," said Shahab Jalinoos, senior currency strategist at ABN AMRO.
Data at the weekend suggesting oil-producing countries have already started diversifying reserves out of dollars only highlighted the negative long-term backdrop for the U.S. currency.
In its quarterly report released on Sunday, the Bank for International Settlements (News - Websites) said OPEC (News - Websites) countries have cut the share of their deposits in dollars by over 13 percentage points in the last three years, mainly to the euro's advantage.
"The reserve diversification story is a long term negative factor for the dollar," said Adam Myers, foreign exchange strategist at Societe Generale. "It is feeding into worries over how the U.S. will finance its deficit and the cyclical story is being forgotten."
To be sure, the prospect of a higher U.S. Fed funds rate -- which makes dollar deposits more attractive -- is providing little support to the dollar.
A Reuters poll last week found all 20 primary dealers surveyed expected the Fed to raise its key rate by a quarter percentage point to 2.25 percent at its December meeting. Sixteen of the 20 looked for another quarter-point tightening in February.
CENTRAL BANKS EYED
Japanese officials in particular have stepped up their warnings in recent days about taking dollar-buying action, calling recent market moves volatile and hinting at possible coordinated intervention with the European Central Bank.
But traders say the market will keep driving the dollar lower until intervention occurs. Some believe Japan may ultimately act alone if yen strength accelerates.
Since early October the yen has jumped nearly 9 percent against the dollar, while the euro has surged more than 9 percent.
Speaking on Monday, ECB Governing Council member Axel Weber said short-term moves in exchange rates could cause a shift in competitive relationships and were "highly unwelcome." But he did little to convince the market that intervention to curb the euro's strength against the dollar was imminent.
"We have had no concrete signals that the ECB is going to intervene," said Myers. "People are looking for stronger verbal intervention first."
The Swiss franc fell against both the euro and dollar after Swiss National Bank President Jean-Pierre Roth said weaker economic growth and high oil prices would prompt central banks to shy away from raising interest rates.
The market took the comments as an indication Switzerland's central bank would not raise rates at its next quarterly policy meeting on December 16.
http://biz.yahoo.com/rb/041206/markets_forex_2.html