Dollar Sinks to Record Low for Third Day

Reuters ^ | Thu Nov 25, 2004 | Katie Hunt

[jb6]

Dollar Sinks to Record Low for Third Day Thu Nov 25, 2004 06:45 AM ET By Katie Hunt LONDON (Reuters) - The dollar sank to an all-time low versus the euro for a third consecutive day on Thursday and fell to a 4-1/2 year trough on the yen, hit by concerns about U.S. deficits and the view Washington is happy to see a weaker currency.

Warnings from Japanese and European policymakers did little to halt the dollar's slide, which accelerated last week after Federal Reserve chairman Alan Greenspan said U.S. deficits were unsustainable and appetite for U.S. assets was bound to dwindle.

"We have moved into a new stage of the dollar decline and (the dollar's fall) has become one of the policy tools policymakers use. The move is very much a full-fledged policy event. Until policymakers truly protest, what's going to stop the trend?," said Jim McCormick, head of foreign exchange research at Lehman Brothers.

The dollar fell to a record low of $1.3235 per euro by 1130 GMT. Against the yen, the dollar fell as low as 102.41 before recovering a touch to 102.54 yen. It has lost more than eight percent against the yen since late September.

The dollar also set new lows against other currencies -- a nine-year low against the Swiss franc, a 16-year trough on the New Zealand dollar and a nine-year low against a basket of currencies.

Weaker-than-expected data from Europe's largest economy had little effect on the euro. The Ifo research institute's pan-German business climate index fell to 94.1 in November, its lowest since September 2003 and below forecasts.

"Data from the eurozone is largely being ignored. Everyone is running with the trend," said Kristjan Kasikov, currency strategist at Calyon.

SNOWBALLING

Several investment banks cut their dollar forecasts, with JP Morgan targeting the dollar at 100 yen and the euro at $1.35 by the end of this year.

French Finance Minister Nicolas Sarkozy said that the United States must be determined to reduce its deficits so that the currency does not distort trade exchanges.

Japanese officials, worried a rising yen would hurt a recovery in the export-oriented economy, also stepped up their rhetoric.

Bank of Japan Governor Toshihiko Fukui said that recent movements in the foreign exchange market were not stable.

Earlier BOJ Policy Board member Hidehiko Haru said he would pay attention to any negative impact the recent rise in the yen had on the economy.

Japan's top government spokesman Hiroyuki Hosoda said the yen's recent surge did not reflect fundamentals and that authorities would act against rapid currency moves.

"The overiding sentiment on dollar is very, very negative and it's a question of playing chicken with the BOJ as to whether they intervene or not," said Tony Norfield, head of foreign exchange research at ABN AMRO.

Japan has not intervened in currency markets since March, after a record 20 trillion yen ($194.4 billion) of dollar-supporting intervention in 2003.

YUAN TALK

Also pressuring the dollar against the yen was speculation that China may decide to revalue the yuan in the next few days.

The talk mounted on Thursday with the premium on the yuan in the offshore market surging to its highest in more than a year with some analysts saying Beijing could reach a decision at an annual high-level economic meeting this weekend.

It is widely believed that freeing the Chinese yuan from its peg of around 8.28 per dollar will result in an appreciation of the currency and lift other Asian currencies with it.

China has come under heavy pressure from the United States to allow the yuan to appreciate, as some U.S. manufacturers say an artificially cheap yuan hurts jobs and exports.

Later on Thursday, the chief economists of the European Central Bank and the Bank of England are expected to make speeches in separate appearances.

[familyop]

"I went last year to a speach and tour of the new "green" building complex built by the Environmental Agency of my state. Their IT building had $150,000 worth of solar panels. On the best and brightest day, it generates 10KW electricity. Yup, that's it."

They had money to burn and throw away on feelings and appearances, then, didn't they. Many of us have known for several years (before that project started) that builder/consumer material cost of PV cells would be cut in half soon by an ongoing development (some kind of thin layer tech., IIRC). ...probably before the end of next year, at a guess, as supply rates meet world demand for the new cells.

[Axenolith]

Wildcat can make a killing by converting diesels to vegetable or other oils and automobiles to alcohols...

[jb6]

That's its market value, it's accounting value is the cost of making it, storing it, and selling it.

[snowsislander]

If there is a Freeper-Economist-Wiz lurking out there it would be nice to hear some authoritative discussion on the possibility.

Disclaimer: I am no authority, and I am no wizard economist. But as a freeper in good standing, I will happily hold forth on the subject.

I think it is moving out of the economists' area for now and into the traders'. It might be best to listen to -- and watch -- them at least for a while.

You probably won't hear a lot from the best ones, but watching the market should tell the story best.

First, the dollar could easily snap back and destroy the most aggressive speculators.

If any of you were in the Asian currencies back in the late 90s, think about some of those swing days. Heavy leverage could blow you out of the water just as well it could make you wealthy. Julian Robertson was one of those who lost his shirt in games a lot smaller than this one; when the yen snapped back, billions of dollars disappeared from Mr. Robertson's hedge funds:

But the reporting on Tiger's demise was surprisingly sympathetic. Some of the stories seemed to cast Mr. Robertson as a victim, the defender of genuine economic values against irrational hype. And that is apparently how he sees himself: he was withdrawing, he said, "from an irrational market, where earnings and price considerations take a backseat to mouse clicks and momentum."

In some ways he has a point. He bet heavily, and disastrously, against Japan. Japan's fundamentals still look very dubious, and the recent enthusiasm of Western investors for its stocks arguably reflects herd mentality more than rational assessment. He also bet heavily against "new economy" stocks, and the beating the Nasdaq took last week, while too late to save Tiger, may provide some intellectual vindication. Still, Mr. Robertson's complaint about irrational, momentum-driven markets is ironic because he himself could not have thrived if markets were as rational as he now complains they aren't.

These waters can run deep, mighty deep. The Bank of Japan has the financial resources and the financial authority to act, if they decide to: " The Bank of Japan will conduct money market operations, aiming at the outstanding balance of current accounts held at the Bank at around 30 to 35 trillion yen. Should there be a risk of financial market instability, such as a surge in liquidity demand, the Bank will provide more liquidity irrespective of the above target." (35 trillion yen is $340 billion equivalent cash at 102.6) In my estimation, just the Chinese and the Russians alone cannot put enough dollar debt out that the Japanese cannot purchase it. The speculators' pockets don't appear to be nearly deep enough even with leverage -- and that leverage is a two-edged sword.

The Japanese show a large trade deficit themselves with China for the first six months of 2004. Weakening the yen in the face of a trade deficit isn't a good idea, and I would be surprised if they allowed the yen to weaken much against the yuan.

These are deep waters -- and interesting times.

[TomasUSMC]

Don't worry, the trade deficit and the national debt are good for the economy, just like outsourcing and illegal immigration, just like no borders and free trade just like the WTO Bi%ch slapping US with fines. Don't worry.

Tell the Iraqis they have got to defend their country because we are not going to do it AND they need to start paying for our troops to be there.

Get the trade back into balance and get out of the WTO.

Stop Illegal Millions from invading US by controling the borders FIRST.

TELL THE IRANIANS IF THEY WANT NUKES

WE WILL GLADLY GIVE THEM SOME RIGHT ON TARGET.

[wildcatf4f3]

if it gets that bad they can pay me in chickens and vegetables

[lentulusgracchus]

Iran has already gone there [diversification away from the dollar] and Russia and Saudi Arabia are under massive EU pressure.

Do you mean European central bankers are pressurizing these countries to dump dollars from their currency reserves and buy euros? Wouldn't that add to the excruciating pressure on the euro-denominated currencies of Europe? The weak dollar is already undercutting their exports.

[lentulusgracchus]

I, I forgot -- Iran already has all the dollars they can use. They've just been printing their own for the last 15 years, using Hamas in the Bekaa Valley to do their counterfeiting dirty work.

[jb6]

They are under pressure not to accept dollars for oil. Yes it does put pressure on the Euro but it also destroys the dollar (aka US economic enemy of the EU) because it causes oil importing nations to dump the dollar and a run on american debt and thus devaluation of the US dollar will cause our global presence to fully collapse. Enter the EU.

[fallujah-nuker]

durasell recommended reading "Extraordinary Popular Delusions and the Madness of Crowds."

It was written in 1841 by Charles MacKay, Bernard Baruch once said the first 3 chapters saved him the price of the book many times over in 1929. Tulipmania was my favorite chapter.

[fallujah-nuker]

Cap Huff wrote "Oh, and by the way, the country I live in is about 6.5% Muslim and rising rapidly (the most common name given to baby boys in the cities is Mohammed [the second is probably Abdul but I don't know that for sure]). A disproportionate number of the foreign born or unassimilated second generation immigrants are on welfare or in low paying jobs."

Sadly they probably a much higher percentage of the population under 20 years of age?

[fallujah-nuker]

Moonman62 wrote "Wouldn't $10 to the Euro be even better? How about $20? All this cheerleading for GWB's weak dollar reminds me of how the German politicians crowed about the cheapness of their exports while they were going through hyperinflation in the 1920's. There's no such thing as a free lunch. The only true economic growth comes from innovation and investment, not jerking a currency one way or the other."

Excellent post, the free trade uber alles crowd seems only to deal in theory. Free trade will end up raising the price of imports by collapsing the dollars value, never mind that it also raises the price of goods we need to import, e.g. bananas.

[Kozak]

Apparently some of these people like the idea of America being owned by the Saudis and Chinese.

20 years ago the hysteria was about the Japanese owning us. That worked out well for them. /sarcasm

[fallujah-nuker]

...'tanstaafl.' Means 'there ain't no such thing
as a free lunch.' ... anything free costs twice
as much in [the] long run or turns out worthless.
-- Manuel, _The Moon is a Harsh Mistress_ (1967), pg 129

Another gem from Heinlein.

[fallujah-nuker]

Texas Songwriter wrote "At this time I absolutely fear the bond market. Inflation will destroy their value. YOu may wake up and find your bonds worth 50% of what you were told they would sell for."

Outstanding post, my compliments. I think the collapse of bonds will effect retired people mainly, who do vote. What do you expect the political ramifications to be for the party in power when it happens?

[Matchett-PI]

November 26, 2004
http://www.nytimes.com/2004/11/26/opinion/26roach.html?oref=login&oref=login

When Weakness Is a Strength
By STEPHEN S. ROACH - chief economist [with a well-known reputation as a "Bear"] for Morgan Stanley.

Suddenly all eyes are on a weakening dollar. In recent days, the American currency has fallen against the euro, the yen and most other currencies around the world. The renminbi is a notable exception; China has kept its currency firmly pegged to the dollar for a decade.

The fall of the dollar is not a surprise. It is the logical outgrowth of an unbalanced world economy, and America's gaping current account deficit - the difference between foreign trade and investment in the United States and American trade and investment abroad - is just the most visible manifestation of these imbalances. The deficit ran at a record annual rate of $665 billion, or 5.7 percent of gross domestic product, in the second quarter of 2004.

While a decline in the dollar is not a cure-all for what ails the world, it should go a long way toward bringing about a sorely needed rebalancing. With a weaker dollar, economic and even political tensions among nations would be relieved, helping to promote more sustainable growth in the global economy.

Still, a debate persists as to the wisdom of allowing the dollar to decline. The Bush administration seems to have given its tacit assent, and Alan Greenspan, chairman of the Federal Reserve, is finally on board. But outside the United States, where policymakers have long been vocal in their displeasure over America's deficits, officials are now objecting to America's cure. Europeans have referred to the dollar's recent decline as brutal. The Japanese have threatened to intervene again in foreign exchange markets. And Chinese officials have argued that global imbalances are "made in America."

In this blame game, it's always the other guy. Yet global imbalances are a shared responsibility. America is guilty of excess consumption, whereas the rest of the world suffers from insufficient consumption. Consumer demand in the United States grew at an average of 3.9 percent (in real terms) from 1995 to 2003, nearly double the 2.2 percent average elsewhere in the industrial world.

Meanwhile, Americans fail to save enough - whereas the rest of the world saves too much. American consumers have borrowed against the future by squandering their savings. The personal savings rate was just 0.2 percent of disposable personal income in September - down from 7.7 percent as recently as 1992. Moreover, large federal budget deficits mean the government's savings rate is negative.

Lacking in domestic savings, the United States must import foreign savings to finance the growth of its economy. And it runs huge current-account and trade deficits to attract such capital from overseas.

America's consumption binge has its mirror image in excess savings elsewhere in the world - especially in Asia and Europe. For now, America draws freely on this reservoir, absorbing about 80 percent of the world's surplus savings. Just as the United States has moved production and labor offshore in recent years, it is now outsourcing its savings.

This is a dangerous arrangement. The day could come when foreign investors demand better terms for financing America's spending spree (and savings shortfall). That is the day the dollar will collapse, interest rates will soar and the stock market will plunge. In such a crisis, a United States recession would be a near certainty. And the rest of an America-centric world would be quick to follow.

The only way to avoid this unhappy future is for the world's major central banks to carefully manage a gradual but significant depreciation of the dollar over the next several years. America, and the world, would gain in several ways.

First, there would be a gradual rise in interest rates in the United States - compensating foreign investors for financing the biggest debtor in the world. That would suppress growth in those sectors of the American economy that are most sensitive to interest rates, like housing, consumer durables like cars and appliances, and business capital spending. The result: a higher domestic savings rate and a reduced need for foreign capital - a classic current-account adjustment.

Second, when the dollar falls, other currencies rise. So far, the euro has borne a disproportionate share of the change. That puts increased pressure on Asian nations - including China - to share in the adjustment by allowing their currencies to strengthen. Most currencies in Asia are now rising, but the renminbi has remained conspicuously unmoved.

Third, as the currencies of Asia and Europe strengthen, their exports will become less attractive to American consumers. This will force Asia and Europe to work to stimulate domestic demand to compensate - resulting in a reduction of both excess savings and current-account surpluses. This is easier said than done, especially since it may require painful structural reforms, like a loosening of domestic labor markets, to unshackle internal demand.

Fourth, a weaker dollar might defuse global trade tensions. Dollar depreciation will support American exports, and higher interest rates should slow domestic demand and reduce imports. That means the United States trade deficit should narrow - tempering protectionist risks. And with Asian countries allowing their currencies to fluctuate, Europe gets some relief and may be less tempted to resort to protectionist remedies.

What's certain is that a lopsided world needs to be put back into balance. The dollar is the world's most widely used currency, but its fall affects more than just foreign-exchange rates. A weakening dollar is an encouraging sign that the world's relative price structure - essentially the value of one economy versus another - is becoming more sensible. If the world can manage the dollar's decline wisely, there is more reason for hope than despair.

Stephen S. Roach is chief economist for Morgan Stanley.

[fallujah-nuker]

nanak posted ""The spirit of manufacture has taken deep root among us, and its foundations are laid in too great expense to be abandoned." --Thomas Jefferson to Pierre Samuel Dupont de Nemours, 1809. ME 12:294"

Thank you for the quote, I find it interesting to not that both free traders and economic patriots can use quotes from Thomas Jefferson to buttress their arguments, but the ones that economic patriots use are from when he was older and wiser, and learned as a result of spending 8 years in the White House.

[Joe Hadenuf]

At this time I absolutely fear the bond market. Inflation will destroy their value. YOu may wake up and find your bonds worth 50% of what you were told they would sell for.

Could very well happen.

[snowsislander]

20 years ago the hysteria was about the Japanese owning us. That worked out well for them.

Actually, it has worked out just fine. Japan owns about $140 billion of direct investments in the U.S., $150 billion of our equities, and about $500 billion of U.S. debt as of the end of 2003. The Japanese government also owns about $720 billion of our government debt (as of September, 2004). All told, that's just over $1.5 trillion in gross assets -- over 10% of our total GDP, if you like to think of things that way.

Japan is the world's richest nation in terms of external net assets, for the 13th year in a row; we are the world's biggest debtor nation. It's not surprising that Japan owns a lot of the U.S., and we don't own that much of Japan.

It's not all bad news for us: we do own more of the world than the Japanese do in gross terms -- the problem is that we have let our debts grossly outweigh our assets:

[durasell]

What is interesting about the book is that, if I remember correctly, McKay was an actor, song writer, journalist, etc. He wasn't an economist by training, though there were few economists as we understand the word today. I believe his perspective was one of narrative or story of manias. Baruch, by the way, wrote the introduction to the edition issued in 1929.

Also, if you're interested, Galbraith (liberal economist) wrote a much shorter version called A SHort History of Financial Euphoria.