Posted on 12/07/2004 3:46:41 AM PST by RWR8189
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LONDON (Reuters) - The dollar tumbled to a record low against the euro on Tuesday after a warning by euro zone officials on the euro's rise fell on deaf ears, with investors determined to dump the U.S. currency.
In a joint statement late on Monday, the European Central Bank and euro zone finance ministers gave their starkest warning to date that they were unhappy with the euro's strength.
In an echo of developments that preceded the ECB's maiden intervention in the currency markets of 2000, the statement said policymakers were monitoring the situation closely.
But the dollar, under pressure from concerns about the massive U.S. current account deficit, hit a low around $1.3468 and a 12-year low against sterling beyond $1.95.
"The credibility of the threat of ECB intervention is low particularly after the ECB discussed an interest rate hike last week. It makes no sense to intervene and raise rates at the same time," said Carsten Fritsch, currency strategist at Commerzbank.
"Unless action is taken at this stage the dollar will fall further."
Analysts said a report in the Wall Street Journal Europe questioning the U.S. government's triple-A bond rating also hurt the greenback.
The WSJE article, which canvassed investors' opinions on the U.S.' rating, triggered selling in a market already prepared to take the dollar lower.
A U.S. bank trader said: "I don't believe there will be a downgrade but the initial reaction was to sell the dollar."
By 5:30 a.m. EST, the dollar stood at $1.3446 per euro, down a third of a percent from New York levels. It fetched 102.54 yen, down 0.6 percent on the day.
The dollar has shed roughly nine percent against the euro and the yen in the past two months. The closely-watched German ZEW expectations indicator rose unexpectedly to 14.4 in December from 13.9 in November as a drop in crude oil costs helped offset concern about the impact of the rising euro on the key export sector.
INTERVENTION JITTERS?
The dollar initially bounced as the euro zone finance ministers' statement late on Monday fueled jitters over potential central bank intervention in the currency markets.
But the effect was short-lived, particularly as the ECB surprised financial markets last week by revealing it had considered raising interest rates even as the soaring euro was threatening to hit exports and growth prospects worsened.
"The comments from the (euro group) meeting were largely repeating previous statements and they are not going to stem the current rise in the euro," said Ian Stannard, foreign exchange strategist at BNP Paribas.
In the meantime, euro zone politicians kept up pressure on the United States to act on the dollar weakness.
Belgian finance minister Didier Reynders said on Tuesday that the statement was a clear message to the United States and it was up to the United States to do something about the imbalances in its economy.
Austrian finance minister Karl-Heinz Grasser said the United States must act, not just talk, to reduce an excessively high euro/dollar exchange rate by reducing its twin deficits.
JAPAN THREAT
Investors were taking more seriously the threat of intervention by the Japanese authorities, which spent around $330 billion trying to fight the dollar's slide between January 2003 and March 2004.
Japanese Finance Minister Sadakazu Tanigaki repeated earlier recent moves in currency rates were rapid and unwelcome.
The latest data from Japan on the October leading indicator suggested a possible economic downturn in the world's second largest economy.
"Japan intervened massively earlier this year so it's more credible regarding intervention. We also had disappointing data there, so Japan's willingness to tolerate the dollar's weakness is lower than Europe," Fritsch said.
The Bank of Canada holds an interest rate meeting later and the Reserve Bank of Australia is also expected to make a decision on rates public. Both countries are expected to leave key rates unchanged.
There are many possibilities here, some of which could make some FX speculators as unhappy as the last time that there was a massive snap back in the yen trade.
And arguably, the momentum in that incident was even heavier than the current momentum which looks to me has hit a slowing period. But this time it is the U.S. dollar, and the game involves possibly breaking a major economy's currency peg.
Interesting times...
And the down side of this for America is ... ?
higher inflation and higher interest rates?
The downsides are :
1) It is harder to sell US Treasury bonds to foreign investors without raising the interests rates and that has the effect of raising our national debt payments which depletes the Federal budget even more.
2) Most of our retail merchandise is imported and sold at places like Target, Wallmart and such, and these retailers are going to be hurt by any drop in the US$, especially if China decouples from the US$. While American production would escalate, the immediate effect would be numbers of people unemployed as the retailers start layoffs if their profits dropp.
3) This cuts into the value of saved money (penalizing savings) and hurting people on fixed incomes.
Thats just things off the top of my head in about 4 minutes; theres a lot more I donthave the time to go into.
What's this morning's chatter that OPEC is trading out of dollars into euro's?
You mean like when Jimmy Carter was president and we all starved to death?
You mean it will be harder for people in foreign counties to buy up America?
You mean because the stock market will get the jitters? ;)
Haven't seen signs of it yet. Interest rates will creep up as our economy grows, but not because of pressure from inflation.
And the upsides?
BTW ... I'm not being cute here.
Although it is good for our exports, if left to go on much more and our money will become worthless. High inflation and interest rates come to mind, but what really comes to mind is the Weimar(sp) Republic of Germany before Hitler took power.
I knew a couple of old Germans who got out of there just as Hitler was gaining steam. He said that they would pay you once a week as usual, then twice a week, then once a day and let you off from work for two hours just so you could spend that money they gave you to get it into play. It virtually took a wheel barrow load of money to buy bread.
I doubt it will get anywhere near as bad as that..but it nearly did under Jimmah Cartier.
BTW..this is one reason the gas prices are high.
The up sides are that our manufacturing base grows and the trade imbalance drops.
But we risk a panic sell off of the US$ and that has absolutely no upside at all.
I don't remember it being that bad. Of course I wasn't having to finance construction projects either.
Economics is not an exact science, by any stretch.
I tend to think there is a "control" war going on.
We'll see who flinches first. ;)
I think we can all agree that getting most of our oil from the Middle East has caused us a certain about of pain, and yet the EcoNuts have us so bottled up we are prevented from using the resources we have close at hand, and so could this be a way of making OPEC do something really stupid (that would have the potential of causing us even more pain), and by which this administration can go on the offensive against the EcoNuts and open up, oh let us say Alaska to oil drilling. Are how about off the coast of California, or anywhere we can find oil.
This President has shown the ablility to ignore polls, and the pundits and set things in motion that do not reveal themself until months, or years later.
I happen to believe this current hobby of the left over "voter fraud" is going to come back and bite them in the butt when the President ask for legislation to overhaul our election process. The one thing they have forgotten is if new laws are written, it will be by Republicans, not Democrats.
The Gulf coast of Florida is another place that could be opened up for gas and oil.
If foreign investors lose interest in our debt (which may have already started happening), we will be forced to raise interest rates to attract investors, which could slow economic growth and lead to stock market and real estate declines. There is also a threat of stagflation (inflation despite stagnant growth).
A dollar decline wouldn't be such a bad thing if it were to happen very gradually, but the dollar appears to be in freefall right now. If it is not stabilized soon, we could be looking at a lower standard of living and potentially he Euro as the new reserve currency.
Aussie dollar has risen about 10% against the US Dollar in the last three months.
For some reason you don't seem to realize our deficit in terms of our GDP is smaller than most of your European buddies and i believe even the Japanese. Europe still has higher unemployment and lower growth. I really don't see the dollar weakness as long term.
This is the money used for speculation in crude oil market and the currency hedges to protect the speculators that is moving from dollars to euros. This will be over when the oil prices fininsh their post election drop. Damn Soros.
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