January 7, 2005
Bloomberg
The dollar dropped the most in more than two weeks against the euro after Treasury Secretary John Snow suggested the U.S. won't strengthen its currency.
Exchange rates are best set by markets, Snow said late yesterday, failing to repeat a Jan. 7 remark that the Bush administration wants to ``sustain the strength'' of the dollar. Last week's comment helped spur the currency's second-biggest weekly gain ever against the euro. The dollar fell for a third straight year in 2004.
``The administration's position remains the same; they favor a strong dollar but a dollar determined by the markets,'' said Hugh Walsh, a currency trader in New York at Fortis (USA) Financial Markets, a unit of Belgium's biggest financial- services company.
Against the euro, the dollar declined to $1.3164 at 9:32 a.m. in New York, from $1.3073 late yesterday, the biggest drop since Dec. 23, according to currency-trading system EBS. It also fell to a one-week low of 103.76 yen, from 104.34. The dollar may trade between $1.3050 and $1.32 today, Walsh said.
The dollar extended its loss after an industry report showed rising investor confidence in Germany, Europe's biggest economy. The figures eased concern growth in the 12-nation euro region may be stagnating. The ZEW Center for European Economic Research's index of institutional and analyst sentiment rose to 26.9 in January, beating the median forecast of 18 in a Bloomberg survey.
Not Deliberate
``We have a confirmation that there will be an expansion of growth in 2005 and this data is supporting the euro,'' said Benedikt Germanier, a currency strategist at UBS AG in Zurich. UBS forecasts the euro will gain to $1.34 in a month.
Snow told CNBC on Jan. 7 that ``we want to do things that sustain the strength of the dollar,'' including trimming the budget deficit. He didn't highlight previous remarks favoring market forces setting currency values. Snow yesterday told Reuters in a television interview that ``just because I don't say something doesn't mean it's not part of our policy.''
``There was a little uncertainty as to whether Snow's comments last week deliberately left out that exchange rates should be determined by the market,'' said Jens Nordvig, a currency strategist in New York at Goldman Sachs Group Inc. ``We didn't think that it was deliberate so we're not surprised that the dollar is trading lower.''
He forecasts a dollar fall to a record $1.40 by the end of the year. The current record low is $1.3666, reached Dec. 30.
Trade Gap
European Central Bank President Jean-Claude Trichet said yesterday he ``appreciated'' Snow's Jan. 7 comment. ``Global observers have taken that mention very, very seriously,'' Trichet also said at a press conference after central bank governors from the Group of 10 nations met in Basel, Switzerland.
A government report tomorrow may show the U.S. November trade deficit was $54 billion, down from a record $55.5 billion in October, though still the third-biggest on record, according to the median forecast in a Bloomberg survey. The deficit in the current account, the broadest measure of trade, was a record $164.7 billion in the third quarter.
``I don't think that's any reason for optimism'' given the limited degree of narrowing expected, said Walsh at Fortis. ``People are a bit concerned about that.''
The dollar dropped last year on concern record U.S. current- account and budget deficits would lower demand for the currency. It also fell on speculation U.S. policy makers favor a weaker dollar to help shrink the gap in the current account by reducing the cost of exports and making imports more expensive.
Current-Account Gap
``If our current-account deficit continues to grow, foreign investors can't be counted on to keep lending to the United States on the same terms as in the past,'' Federal Reserve Bank of Atlanta President Jack Guynn said in a speech in Atlanta yesterday.
The current-account deficit helps explain last year's decline in the dollar, said Guynn, a voting member of the Fed's interest-rate setting committee for the February and March meetings this year. The dollar fell 7.1 percent against the euro and 4.3 percent versus the yen last year.
``The dollar will weaken to about $1.40'' per euro in 2005 as the deficit saps demand for the U.S. currency, said Michael Mewes, who helps manage the equivalent of $8.5 billion at J.P. Morgan Fleming Asset Management in Frankfurt.
Today's gain in the ZEW index comes after government figures last week showed German unemployment rose to a seven-year high in December and the French economy failed to expand in the third quarter. Expectations faster growth in the U.S. will widen the interest-rate gap between the U.S. and the euro region helped spur a 3.8 percent gain in the dollar last week.
Dollar May Gain
The ECB has kept its benchmark rate at 2 percent since June 2003. The Fed raised its target rate for overnight loans between banks five times last year, to 2.25 percent. Minutes from the Fed's Dec. 14 meeting said the rate is ``below the level'' needed to damp inflation.
``Interest-rate differentials do matter,'' said David Durrant, chief currency strategist in New York at Bank Julius Baer & Co. ``The U.S. will keep raising interest rates'' this year while the ECB may even cut rates, he said.
Durrant projects the U.S. currency will advance to $1.28 per euro later this year.
Alcoa Inc., the world's biggest aluminum maker, said yesterday that fourth-quarter profit fell 7.9 percent in part because of a weaker dollar. A falling dollar increases costs in Australia and other countries where the company makes aluminum.
``U.S. dollar weakness and higher input costs continue to pressure margins,'' Chief Executive Officer Alain Belda said in a statement. Currency costs may reach $130 million this year for the Pittsburgh-based company, he said.
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