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Dollar new low against euro nov 17 2004 Original Source Link: (May no longer be active)
http://www.forbes.com/business/energy/feeds/ap/2004/11/17/ap1661523.htmlhttp://www.forbes.com/business/energy/feeds/ap/2004/11/17/ap1661523.html
Associated Press
Update 4: Markets Push Dollar to New Low Against Euro
11.17.2004, 12:05 PM
The U.S. dollar plunged to a new low against the euro Wednesday as markets shrugged off Washington's insistence that it is committed to a strong dollar. And with the causes of the drop - worries over oil prices and the U.S. trade and budget deficits - not going away, some economists see the euro soaring to $1.35 or beyond.
The euro spiked up to $1.3047 in morning European trading, breaking through a week-old record of $1.3007. The surge has fed worries of damage to Europe's export-led recovery by making exports more expensive.
The euro, launched in 1999, is now 58 percent above its all-time low of 82 U.S. cents from October 2000.
Economists see little prospect of intervention by the United States, which appears unworried by the development, or the European Central Bank - wary of intervening on its own even as European officials have sharpened their criticism of U.S. policy.
The dollar still has "quite some time and quite some way" to go, said Mark Austin, a currency strategist at HSBC in London. "We think we're in for a fairly persistent period of dollar weakness that could last for another couple of years."
The euro likely will reach $1.35 next year and $1.40 in 2006 on a "loss of confidence in the United States" fueled by the view that the country's large deficits are "unsustainable," he said.
Bac van Loo, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart, said the dollar was likely to see a bit of a correction, rising back to $1.26 or $1.27 against the euro, before resuming its drop and allowing the euro to reach $1.35 over the next 12 months.
The euro dipped somewhat to $1.3014 in later trading Wednesday, although the insistence by U.S. Treasury Secretary John Snow that there had been no change in the administration's support for a strong dollar cut little ice.
"We believe in open, competitive currency markets," he said, refusing to comment on the dollar's latest low. "We think the world functions best with free trade and free capital flows. Nobody has ever devalued their way to prosperity."
Still, many analysts believe the administration decided to voice support for a strong dollar to avoid rattling currency markets - but also to refrain from intervening. While a weaker dollar hurts foreign exporters and leaves American travelers with less to spend, it could help tackle the U.S. trade deficit by helping American exports.
Snow's support for a strong dollar "is ringing hollow," said Riz Din, a currency analyst with Barclay's Capital in London. "At the same time, he's saying that Europe must improve its economic position."
Din forecast that the euro would reach about $1.32 in the next three months but likely would then head lower as oil prices drop and healthier U.S. economic data return to center stage.
Meanwhile, "there doesn't seem to be a particular level that's a line in the sand" for European leaders, he said.
Indeed, the dollar appears to remain the world's currency of choice.
Snow dismissed suggestions that Asian central banks may reduce their holdings of Treasury securities. "Our debt markets are the deepest, broadest and most liquid anywhere," he said. "We are readily able to market U.S. Treasuries."
Austin noted that Asian reserve managers have diversified somewhat out of the dollar over recent years, adding that "we'll see a further gradual diversification."
But, with the dollar still by far the dominant reserve currency, he said there is no sign of a "wholesale exit."
The euro's current rally has taken the currency from about $1.20 two months ago, prompting European Central Bank President Jean-Claude Trichet to call the surge "brutal" last week.
Dorothea Huttanus, an economist at DZ Bank in Frankfurt said she expected more such verbal interventions - although no action by the bank, such as selling euro reserves to drive down the exchange rate - if the currency continues moving toward $1.35.
The bank has stopped short of targeting any specific exchange rate level, and has expressed concern only over unduly fast movements. Interventions don't always produce the desired results, especially if the ECB were to go it alone, and U.S. participation in such a move now is considered unlikely.
"It's clear the greenback has become unhinged compared to the world's other currencies," French Finance Minister Nicolas Sarkozy said Tuesday. "Now it's up to the Americans to respond."
German Chancellor Gerhard Schroeder also expressed concern, saying Tuesday that "everyone is concerned about the euro-dollar rate and the effect this has on exports," he said. And the European Union's monetary affairs commissioner, Joaquin Almunia, signaled skepticism over Snow's earlier reiteration of the "strong dollar policy."
"I welcome the words of Mr. Snow asking for a strong dollar, but I will need to see what decisions are adopted in that direction," Almunia said at a meeting of EU finance ministers.
In addition to intervention on currency markets, actions that could support the dollar could include reducing the federal budget deficit or raising interest rates, the province of the independent U.S. Federal Reserve.
Last week, the Fed hiked interest rates by a quarter of a percentage point, to 2 percent. It was the Fed's fourth quarter-point rate increase and many economists expect the central bank to raise rates further.
Snow will have a chance to address European concerns this weekend at a meeting in Berlin of the Group of 20 major industrial and developing nations.
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