Eric Pfanner:Greg Palast :
(© The International Herald Tribune, November 9, 2002)
Dollar declines to a 3-year low against the euro
LONDON The dollar on Friday fell to its lowest level against the euro in nearly 3
years as traders dumped U.S. investments whose yields suddenly became less
attractive after the Federal Reserve cut interest rates and the European Central Bank
The euro has
risen nearly 5 percent since mid-October. The rally accelerated Friday
the single currency rose to $1.0133 in late trading from $1.0097 late Thursday, its
strongest level since January 2000.
In the process,
analysts say, the currency market has dealt a blow to yet another New
Economy perception: The idea that investors will always reward countries that adopt
pro-growth policies, such as low interest rates, by buying their currencies.
traders seem to be turning back the clock to the Old Economy
axiom that differences in interest rates are the crucial factor in determining the strength
of a currency.
After the Fed
cut the federal funds rate to 1.25 percent on Wednesday and the ECB
held its main rate at 3.25 percent on Thursday, the gap between borrowing costs in the
United States and the euro zone grew sharply.
praised the Fed move as an aggressive-but-necessary step to help
stimulate the U.S. economy, which the central bank acknowledged was going through
a "soft spot." The ECB's inaction, meanwhile, was met with near disbelief among some
economists who said the bank's inflation-fighting mandate may consign the euro zone
to unnecessarily high borrowing costs and sluggish - if any - growth.
But the ECB's
stubborn stance helps to strengthen the euro, some analysts say,
because euro-denominated investments suddenly look more attractive in relation to
those denominated in dollars. In particular, the difference in the yield on euro-zone
bonds has grown sharply in recent weeks compared with yields on U.S. Treasuries.
"We live in
a different world," said Lorenzo Codogno, an economist at Bank of
America in London. "The market is paying more attention to interest rate differentials
the euro could fall back within weeks as more signs of economic
weakness emerged in the euro zone. By contrast, the Fed's action may set the stage
for a stronger performance in the United States.
volatility in the currency markets might continue. Still, many analysts
predict that the dollar's decline, which began early this year, has further to go. Many
investors have long been wary of the huge U.S. current account deficit, the financing of
which requires a constant inflow of foreign funds. When those flows slow, as they have
been in recent weeks, the dollar falls.
research director at the consultancy 4Cast in New York, says that with
interest rates so low in the United States - only Switzerland and Japan, among
developed countries, have pushed them as low or lower - holding dollars might no
longer be worth the "currency risk" associated with the current account deficit.
For the first
time since 1993, real interest rates in the United States have pushed into
negative territory. That is, the rate of inflation is now higher than the benchmark interest
rate - great for borrowers, but not good for investors who also get negative real
may have reached the tipping point where they begin to matter,"
And with volatility
in stock markets still high, international investors may be wary about
putting their money to work on Wall Street. That lowers capital flows into the dollar,
further weakening the currency.
To be sure,
analysts are divided about how low the dollar will go. Some say that if
U.S. economy comes back to life, the currency will follow - particularly because the
euro zone seems to be sinking deeper into the doldrums.
But a weaker
currency could help the U.S. economy, unless the slide in the dollar turns
into a rout. American manufacturers have been calling for a weaker dollar for months,
contending that the strength of the currency was hurting them in export markets.
Now, courtesy of the Fed and the ECB, they may be getting what they hoped for.
Yen gains may not last
The yen's recent
gains might be short-lived, analysts said Friday amid speculation that
Japanese finance officials will sell yen in coming days because of concern that the
currency's strength is hurting efforts to revive the export-driven economy, Bloomberg
News reported from New York.
The dollar was at ¥119.80 in late trading Friday, down from ¥121.14 late Thursday.
"The yen at
119 or anything stronger than that is a blow to exporters," said Keita
Yamaki, vice president at Mizuho Corporate Bank Ltd.'s customer group in New
York. "Japan will take any means to secure economic recovery," and may sell the
currency if the yen rises toward that level next week, he said.
vice finance minister for international affairs, said recently that gains
in the yen were inappropriate.
In other trading,
the dollar fell to 1.4430 Swiss francs from 1.4496, while the pound
rose to $1.5911 from $1.5801.