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.

[Caipirabob]

Really? Try buying oil. As the dollar become more worthless, everything we import becomes more expensive. The problem is, not only is oil expensive, but all those shiny factories we sent to China, well the news is, they're not coming back. So all the Wallyworld crap gets more expensive too. As oil goes up so does your cost in gasoline, heating, delivery charges, fruits and vegetables (petroleum based fertilizers) and all the plastics that are in everything.

You just made a great argument for increasing domestic production. Both in manufactured goods and oil -Off shore and ANWR! All of the sudden, it ISN'T CHEAPER TO OUTSOURCE!

You see, if it's cheaper to build it here than in Europe or other s*-hole foreign nations, well, a lot of those industries are going to have to build right here where they can afford it!

And yes, those shiny factories we sent to China will come back if that's what the economic trend dictates. Don't think for a second that such industries have forgotten how to be capitalists. They are not going to manufacture abroad if they can realize greater profit by building domestically, their shareholders will kill them.

[durasell]

That's pretty amazing to me. I know many people out there and they will defend Prop 13 tooth an nail. That's not to say I don't believe you, just that I find it amazing.

[DB]

Actually that isn't completely true.

You can have your property reassessed if values have dropped substantially.

In some cases it may take a court order though...

[Chgogal]

And if the Asian Central Banks pull out of the dollar and causes great economic difficulties here in the States...who the will buy all those delightful Asian products. The Dutch, the Germans, the Chinese, the Taiwanese, the French? Won't the GM and Ford products become cheaper?

[durasell]

Those factories are probably never coming back. The price differential in terms of salary is too great. Unless American labor drops below a buck an hour, then it's more cost effective to manufacture offshore.

[familyop]

"Try buying oil. As the dollar become more worthless, everything we import becomes more expensive. The problem is, not only is oil expensive, but all those shiny factories we sent to China, well the news is, they're not coming back."

Hmmm. Other countries (like China, for one) are using much more oil. Oil is getting more expensive everywhere (not only for us), so freighter hauls will cost too much to continue importing so many manufactured products. We won't be able to continue to sell off so much lumber to China, and much new domestic manufacturing will have to start here. Our own cheap labor will start working for overseas companies.

...looks like it's going to be a painful transition for some, and maybe a good thing for others.

[wildcatf4f3]

Yes, but by working myself to death for the last 5 years, my tools are 95% paid off and my building (half paid for) serves both as business at one end and home at the other giving me a 70% tax write off since it is commercial property. One can live on commercial property in Boone Co. Mo. The last economic slowdown hurt mechanics some because of the 0% financing on new cars but they can't do that again so people will have to get their old stuff fixed. When I chose to open this place I didn't do it to have fun or make a killing. I did it to stake my claim to a living for the rest of my life.

[meenie]

Bingo, you are making a prediction of the wage rate when the bottom settles out. Market forces will equalize the disparity that we now see.

[durasell]

Apologies, I misunderstood your use of the term "recession proof." I took it to mean a downward slump in business and perhaps income. I am supposing you took it to mean a job ending event. If I'm supposing correctly, then yes, mechanics are "recession proof."

Also, as a self-employed guy myself for the past 20 years, I've learned to make adjustments during downturns in the economy. People who work for others, don't typically have that option.

[durasell]

That's not the prediction I made. Hopefully I didn't make it. If wages fall to third world --uh, developing world -- levels, then the U.S. becomes something less than it is.

[snowsislander]

So all the Wallyworld crap gets more expensive too.

It will not be just the Wal-Mart items, though Wal-Mart may be the most dramatically affected. Wal-Mart runs on very low margins so it will most likely see the most dramatic price changes in the event that the yuan is fixed at much above 8. If it floats, I'm curious what Bentonville's plan is. Maybe they will start their "Made in the USA" campaign again.

I was reading the 10K from Havertys, a reasonably large furniture sales company. They have dramatically increased their imports; over half of their furniture is now imported with leather goods at already 100%.

While Havertys has large margins, I didn't see anywhere in their 10K any talk about type of hedging in the event of exchange rates changing underfoot. That means to me that they have probably planned already how to spend those big margins. That means that they will either have to raise prices along with any revaluation, or they will have to cut margins and make some ugly announcements to Wall Street.

I don't imagine that most of the middle-tier companies have sufficient imagination to handle these problems, though I hope that most of the big firms do.

After a moment's reflection at the contretemps that we have seen in corporate governance in the last few years, I really hope that the big firms have thought about this already.

Likewise, with any revaluing of the dollar it is likely that interest rates will move upward more quickly than most had anticipated. Unexpected rate changes can literally destroy certain types of firms that are incautious, such as mortgage brokers that aren't properly hedged.

In general, rising interest rates put a damper on the economy. Rising interest rates and inflation due to the dollar plunging in value is not a great way to start President Bush's second term.

While we might be able to raise exports based on a weaker dollar, the planners probably should bear in mind that we import $1.3 trillion worth of goods -- and a 20% rise that now we would pay $1.56 trillion for those same goods.

The gross value of our total industrial production is currently only at $2.89 trillion of final products in 2000 dollars. We ship about $700 billion of goods overseas.

We are not going to raise our industrial production overnight to over $4.4 trillion to try to save 260 billion dollars. (Sorry that isn't as precise as I would like: the Fed only has gross production valued in 2000 dollars, and didn't put its multipliers anywhere convenient to find.)

A lot of our manufacturing businesses depend on imports for their production although we are blessed with a resource-rich country, unlike Japan which has no resource base.

While some manufacturers such as small textile companies that largely use local inputs for production may well become more competitive against the heretofore brutal import pricing, manufacturers that depend on imports for inputs are going to have to pass the costs on.

We cannot create overnight new industrial capacity. The system has about 10% slack in it right now -- we are at 77% and anything above 90% for the whole economy is war-time scale. 85%-87% utilization is about as high as we go.

In the short run, if we do have significant export growth, it will require some measure of imported industrial inputs at higher prices. These higher prices will work their way through our economic system, and we will see them as inflation -- remember the 1970s?

[familyop]

"Unless American labor drops below a buck an hour, then it's more cost effective to manufacture offshore."

And then who will buy those offshore products here, especially with ocean freight costs going up even much more? Importers have been crying about those costs for months.

Where will products to be sold here be manufactured? ...not overseas, IMO. ...maybe places like Venezuela, Brazil and Argentine, if our investors and officers want to get that anti-American. ...and if such practice is not outlawed here for defense reasons.

[snowsislander]

And if the Asian Central Banks pull out of the dollar and causes great economic difficulties here in the States...who the will buy all those delightful Asian products. The Dutch, the Germans, the Chinese, the Taiwanese, the French? Won't the GM and Ford products become cheaper?

You are correct: if U.S. consumer demand for Asian products drops, the E.U. and Asia will largely be the customer base for Asia's products.

But they already are: the U.S. only represents about 23% of Japan's exports, and only about 21% of China's exports (although we do provide most of China's profits.)

As to exports, you are also correct that we should be able to see our big four exports for better prices: aircraft and aircraft parts, auto parts, agricultural products, and semiconductors. However, all of those have more or less exposure themselves to import prices for inputs.

[durasell]

We have to get smarter. The whole service economy thing, in my opinion, is a joke. And what I think, we have to build things here that add value to the basics that are imported. For instance, we might not make the computer chip here, but we sure as shootin' better program it here. And we have to do a better job of programming it than anyone offshore can. The other thing is -- we can make things here that are highly unique and high quality. Harley Davidson comes to mind, even though I don't know that much about the company, but I do know there are several furniture manufacturers that are doing a booming business with high quality, very unique, American made products.

[familyop]

I agree very much that we have to get smarter and encourage technical ingenuity. Along with the weaker parts of the "service economy," many of the stifling, divisive social policies must go. Granted...not to the extent of tossing civility away and allowing off-color comments in offices. But some of our newer social norms pushed on students in universities tend to chase our best analytical minds out of engineering and other technical programs. And if instructors don't do it, corporate social policies finish them off.

I've watched as some hired through "affirmative action" falsely accused and chased polite, young men right out of IT departments only because they were men.

[snowsislander]

hopefully dollar hits 2 to 1 dollar per euro and stays there for 10 years. This will kill the European Union basicly. It will also kill the deficit more or less by creating an inflation rate that will eat away at the money other countries use to peg their currency by using treasuries and create a negative bond sort of like when the people bought warbonds during ww2 knowing when they mature the money will be semi-worthless.

There is a problem with such a cavalier attitude toward one's money: other countries acquire it also. That means that your credit rating gets lowered, which means if that you need to borrow money from these folks, they are going to ask a more in interest. And if you are inflating your money supply as you mention, then they will ask a lot more in interest rates.

We are the world's largest debtor nation, and we borrow a lot of money:

Having to pay higher interest rates to finance our trillions in debt is not a good idea; we re-financed or created new $1.3 trillion in treasury debt in 2003. (You have to dig through through footnote 2 to get some of the details.) If we do the same next year (President Bush does have a plan to drop the new borrowing portion from $400 billion each year to $200 billion), then if it is at higher interest rates, we will be in the vicious circle of borrowing more money just to pay the interest from those higher rates -- unless we can convince those spendthrifts in Congress to stop spending so much money.

[wildcatf4f3]

I have never had alot of money so I don't really know what I am missing. I spent most of my life in the arts - especially dying artforms with no possibility of wealth -- it got OLD!!! My job is very difficult; mentally, physically etc,,,but the harder it is the greater the sense of accomplishment I have--now the bank doesn't take "sense of accomplishment" as legal tender, but I do believe that, living spartanly (lots of practice as an artist!) I can keep the roof over my head and the door open. OK , here it is -- I just am so grateful, I thank the Lord everyday for getting me sober. This is literally my second life and hopefully, I made a wise choice with the business. Great to pick your brains on economics, really enjoy it. Now back to welding. Yes I know its 5:30 in the morning, but hey, I promised them their car tomorrow. G'night.

[durasell]

Agreed! And we have to understand something very clearly -- get it firmly implanted in our skulls -- these people in places like India, China, etc. are not playing around. They are competing very hard against us in business. And they're playing for keeps. People can say what they want about Wal-Mart, but they "get it." They've played and continue to play a very tough game and it's paid off handsomely for them.

[durasell]

Good night wildcat! It's been a pleasure. When next we meet I'd like to ask you about those hybrid cars. I rode in one recently and was quite impressed.

[CIB-173RDABN]

Can you say $5.00 a gallon gas?

---

Can you say opening up Alaska for drilling, how about off the coast of California?

We are buying crude oil from the middle east because we have restricted ourselves as to when and where we drill for oil.

At some point the American people are going to slap the environuts asside, and we will use the resources we have in this country.