December 13, 2004
By Justyna Pawlak
Yahoo Finance
LONDON (Reuters) - The dollar lost ground against the euro and the yen on Monday after a brief rebound last week, as investors grew cautious ahead of U.S. data on trade, the current account deficit and investment flows later in the week.
The figures will highlight investors' biggest concern about the U.S. economy: its ability to attract enough future foreign investment to plug the rising current account deficit.
Expectations for a deteriorating reading in the deficit data undercut last week's demand for dollars, driven by profit-taking on bets on further dollar losses. They could also offset any support to the U.S. currency from a widely-expected Federal Reserve interest rate rise on Tuesday.
"There is nothing which is holding back the U.S. dollar from weakening and this is the theme for 2005. This week, the external funding needs and potential flows will be closely observed," said Hans-Guenter Redeker, chief foreign exchange strategist at BNP Paribas in London.
At 1245 GMT the dollar was down 0.3 percent on the day versus the euro at $1.3258 after gaining more than three cents from last week's record low of $1.3470 per euro.
Investors pushed the dollar down to that level, along with multi-year lows against other major currencies, mainly on worries about funding problems for the U.S. economy and expectations that Washington would do little to stop the dollar's fall.
Against the yen, it was down a quarter percent from Friday's close at 104.90 yen. This compared with a five-year low around 101.80 yen set earlier this month and last week's peak of 106.19 yen.
Traders said volumes were already thinning significantly ahead of Christmas.
At 1330 GMT, U.S. retail sales are expected to show a 0.1 percent decline in November, compared with October's 0.2 percent rise.
PERSISTENT QUESTIONS
Some analysts said a rate rise from the Fed, which is expected to raise borrowing costs by a quarter percent, could provide some short-term support for the dollar by highlighting the benefits of the currency's rising yield.
Such a Fed rate rise would take its fund rate to 2.25 percent, more than double late June's levels and lifting it above the euro zone's 2 percent level for the first time in more than three years.
But few analysts expect any lasting support that could diminish worries about the structural issue of the current account deficit.
"Last week's rise lacked real fundamental support and this week there is a lot of potential for damage," said Michael Klawitter, senior currency strategist at WestLB in Dusseldorf.
"There is the current account and trade data and the market is focusing back on the risks related to them."
Tuesday's data is expected to show the U.S. trade gap swelled to $53.0 billion in October from $51.56 billion in September, while Thursday's figures for the current account in the third quarter are forecast to show a $170 billion deficit versus $166.18 billion.
On Wednesday, the U.S. Treasury releases its flows data for October, showing the amount of foreign money flowing into the U.S. economy.
Foreign investment in U.S. securities edged higher in September and was ample to cover the current account deficit, but the August data released in October was one of the key factors to trigger the latest leg of the dollar's decline.
"This week will be a tough week for the U.S. dollar. Although enjoying something of a revival over the last week, data on capital flows and trade and current account deficits will not make for positive reading for U.S. dollar bulls," Calyon analysts said in a note to clients.
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