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Dollar's Decline May Slow After G-7 Raises Concern About Drop
By Bo Nielsen and Ye Xie
April 12 (Bloomberg) -- The pace of the dollar's decline against the currencies of the U.S.'s major trading partners may slow after Group of Seven officials expressed concern about fluctuations in exchange rates, analysts said.
The Dollar Index, which measures the currency against six of its main counterparts, has tumbled the past two months amid concern that credit-market losses will push the U.S. economy into a recession. The index is down 6.4 percent in 2008, after dropping 8.3 percent in each of the past two years.
``Since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability,'' the G-7 said, in a statement released late yesterday in Washington. ``We continue to monitor exchange markets closely, and cooperate as appropriate.''
The new language was the first significant change in the G- 7's view of currencies since a February 2004 meeting in Boca Raton, Florida. The U.S. currency reached a record low of $1.5913 per euro this week even as traders speculated that finance leaders would voice support for the dollar
``There is an additional degree of urgency attached to the comments about fluctuation,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``Yet, its one thing making bold statements but that's still a long way away from putting together a plan that may support the dollar.''
Market Intervention
The last time the G-7, which comprises the U.S., Japan, Germany, the U.K., France, Italy and Canada, intervened in the currency market was on Sept. 22, 2000, when they bought the euro after it tumbled 27 percent from its 1999 debut. The G-7 last propped up the dollar in 1995, when it sank to a post-World War II low of 79.75 yen.
``It's more an acknowledgment of the fluctuations but it falls short at looking at some kind of collective action,'' said Samarjit Shankar, director of global strategy for the foreign- exchange group in Boston at Bank of New York Mellon, the world's largest custodial bank, with more than $20 trillion in assets under administration. ``Effectively that's not much there except an acknowledgement of the decline.''
The finance ministers and central bankers downgraded their outlook for the world economy from that of two months ago, blaming the U.S. housing recession, credit-market turmoil, high commodity prices and inflation pressures.
A weaker dollar has made U.S. goods and services more competitive in global markets. Exports increased 2 percent to a record $151.4 billion in February, the Commerce Department said this week in Washington.
`Further Dollar Weakness'
The Dollar Index traded on ICE Futures in New York declined to 71.799 yesterday, from 72.021 on April 4. The G-7 statement was released after the close of trading.
Against the euro, the dollar fell 0.6 percent to $1.5831 this week, from $1.5737 on April 4. The U.S. currency dropped 0.7 percent to 100.77 yen, from 101.47 last week. The Swiss franc advanced 0.8 percent to 0.9999 per dollar and 0.2 percent to 1.5834 per euro. The yen was little changed at 159.56 per euro, compared with 159.69.
``There a strong possibility that we'll soon test $1.60 again'' versus the euro, said Shankar of Bank of New York Mellon. ``Growth differentials are still stacked up against the dollar and since there's no sign whatsoever that the group is about to intervene, that clears the way for further dollar weakness.''
Euro Fails
The euro failed to push through $1.60 as ECB President Jean-Claude Trichet said at the press conference in Frankfurt on April 10 that financial-market tension may have ``a broader than currently expected impact on the real economy.'' Trichet spoke after the bank held the main refinancing rate at a six-year high of 4 percent.
The pound fell to a record against the euro on four successive days ending yesterday on bets the Bank of England will keep cutting interest rates.
The bank lowered borrowing costs a quarter-percentage point to 5 percent on April 10, helping to push sterling to 80.38 pence per euro, the all-time low. The pound dropped 1.6 percent this week against the 15-nation currency.
The yen and Swiss franc rose against most of the major currencies as investors reduced carry trades, in which they borrow funds in a country with low borrowing costs and buy assets where returns are higher.
The Bank of Japan held its target lending rate at 0.5 percent on April 9, the lowest among industrialized countries. The new governor, Masaaki Shirakawa, said growth will keep slowing as rising oil prices weigh on the economy. The benchmark rates are 2.75 percent in Switzerland, 7.25 percent in Australia and 8.25 percent in New Zealand.
Declining Index
The Standard & Poor's 500 Index fell 2.8 percent this week after General Electric Co. dropped yesterday the most since the 1987 crash. The company reported an unexpected decline in profit just a month after it assured investors 2008 earnings would be on target, fueling concerns the fallout from the disruptions in the credit markets is spreading.
Fed officials anticipated the economy would shrink in the first half of the year, with some concerned about ``a prolonged and severe economic downturn,'' minutes of the central bank's March 18 meeting showed. The central bank cut the target lending rate by three-quarters of a percentage point to 2.25 percent at the meeting.
Traders increased bets the Fed will add to its six rate cuts since September, futures on the Chicago Board of Trade show. Traders see a 46 percent chance the Fed will lower its benchmark rate by a half-percentage point to 1.75 percent on April 30, compared with 36 percent odds a week ago. The balance of bets is for a cut of a quarter-percentage point.
To contact the reporters on this story: Bo Nielsen in New York at bnielsen4@bloomberg.net; Ye Xie in New York at Yxie6@bloomberg.net.
Edited by hedgehawk, 12 April 2008 - 11:48 AM.
