Dollar Teeters Above Recent Lows

Reuters ^ | December 28, 2004 | Christina Fincher

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LONDON (Reuters) - The dollar teetered within sight of the previous day's record low against the euro on Tuesday as the market remained confident central banks would not stand in the way of the greenback's decline.

Mixed economic news from Japan had little market impact as traders remained fixated on the United States' huge current account deficit and the need for a weaker currency to correct it.

The dollar is on track to notch up its third consecutive year of losses in 2004 and most analysts think its slide is not over yet.

"There is a very strong consensus that the dollar has further to fall," said Joachim Schuetz, chief economist at UBS in Zurich. "In a very thin market, only a few orders have to go through to push the dollar to technically oversold levels."

The euro bought $1.3620 in holiday-thinned early European trade, having risen as high as $1.3640 in Monday's New York session.

The dollar was steady at 103.10 yen as the market digested a warning from Japanese Finance Minister Sadakazu Tanigaki that authorities would monitor foreign exchange markets over the New Year holidays.

Japan has expressed concern about the yen's export-damaging rise against the dollar, but has not conducted large-scale yen-selling intervention since March.

TOLERANCE THRESHOLD

Analysts had thought the $1.35 level would be a line in the sand for the European Central Bank's tolerance of euro strength, but recent comments from officials have suggested the central bank is unlikely to intervene in the near-term.

On Friday, Dutch Finance Minister Gerrit Zalm said the euro's rise was still within acceptable margins, suggesting little official alarm at the pace of the single currency's gains.

The euro was a touch firmer at 140.40 yen after rising on Monday to 140.74 yen, its highest level since June 2003 and close to an all-time high.Analysts are now waiting to see what reaction policymakers have to the euro's latest surge. Some analysts reckon the ECB may be reluctant to pick a fight with the markets unless currency moves become disorderly.

"ECB officials are hoping to set up the euro as the number two currency after the dollar, so they are likely to be cautious (about intervening)," said Hideaki Inoue, chief manager of the forex division at Mitsubishi Trust and Banking.

Some analysts generally believe Japan has become more tolerant of a stronger yen and would prefer to intervene in coordination with other countries.

Japanese data on Tuesday showed industrial output rebounded less than expected in November while deflation deepened. However retail sales beat forecasts in November while the unemployment rate fell to 4.5 percent -- the lowest in six years.

So far in 2004, the dollar has shed nearly 8 percent versus the euro and the British pound and nearly 4 percent against the yen.