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Low value encourages investment outflows { January 5 2004 } Original Source Link: (May no longer be active)
http://money.cnn.com/2004/01/05/markets/bondcenter/forex.reut/http://money.cnn.com/2004/01/05/markets/bondcenter/forex.reut/
New week, new low for dollar
Greenback falls to record low vs. euro, 3-year low vs. yen as Fed official backs low interest rates.
January 5, 2004: 6:59 AM EST
LONDON (Reuters) - The dollar hit another record low versus the euro and fell to a three-year low against the yen Monday after a top Federal Reserve official reinforced views that U.S. interest rates would remain low for some time.
The greenback fell as low as $1.2695 per euro, before paring losses to $1.2678, compared with $1.2594 late Friday.
The dollar also stumbled to a three-year low against the yen of ¥106.28, breaking down through support around ¥106.65 which has underpinned the dollar for the past month. The dollar bought ¥106.92 late last week.
Fed Governor Ben Bernanke said late Sunday that the U.S. central bank was right to hold interest rates at 45-year lows given the low rate of inflation.
The prospect of interest rates remaining low is expected to encourage investment outflows from the U.S. to other higher yielding currencies at a time when the U.S. needs capital inflows to cover its current account deficit.
The U.S. external shortfall -- a major worry of international investors -- is also likely to be under growing pressure as economic recovery could lead to higher imports.
"We have an economy growing quite nicely but the Fed is showing no intention of hiking rates," said Hans Guenter Redeker, chief foreign exchange strategist at BNP Paribas in London. "We have had some strong data from the U.S. but Bernanke's comments were the most important thing. So the dollar weakening trend is continuing."
Traders said Japanese and speculative names were selling dollars for yen even though the market was wary of Japanese intervention after suspected yen selling action in Asian trading hours.
Japan's vice finance minister for international affairs, Zembei Mizoguchi, said Monday Japan remained ready to step into the foreign exchange market if there was a danger of volatility.
The Federal Reserve's Open Markets Committee is due to meet to discuss interest rates in late January and markets were forecasting U.S. rates to remain on hold then.
The European Central Bank was also expected to stand pat this week as inflation remains near its target range, holding its official borrowing costs at 2.0 percent or at twice as much as U.S. rates at 1.0 percent.
The flash estimate of December inflation in the euro zone showed consumer prices running at 2.1 percent on the year compared with 2.2 percent in November.
Meanwhile, markets were also focusing on comments from policymakers about dollar weakness ahead of this weekend's bi-monthly meeting of central bankers at the Bank for International Settlements in Switzerland and next month's meeting of finance ministers from the Group of Seven industrialized nations.
A G7 source has told Reuters the group will look at the weakened dollar at its February 6-7 meeting. But analysts said key to the meeting would be the stance of Washington, which has so far kept mum on the weak dollar.
Keeping true to Washington's line, Bernanke also said it was a mistake just to look at the dollar's sharp drop against the euro, adding the greenback's fall against a broad basket of currencies had been much smaller.
He said the risk of a "dollar crisis" was low.
However, analysts said Japan was likely to be the loudest to protest against the yen's rise against the dollar. Last year Japan sold a record ¥20 trillion, or $187 billion, -- more than Japan's current account surplus of around 15 trillion yen -- to stem an export-damaging rise in its currency.
But that massive intervention was in part offset by foreign investors buying yen to purchase Japanese shares. Traders expect such flows to continue this year. The Nikkei average ended a shortened half-day session up 1.4 percent Monday.
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