Dollar Drops to Two-Month Low Against Euro, Weakens Versus Yen
Bloomberg | March 8, 2005
The dollar fell to a two-month low against the euro after European Central Bank policy maker Nout Wellink suggested to the Financial Times Deutschland the bank may raise its benchmark interest rate to head off inflation.
Wellink told the newspaper in an interview that the euro region has ``extremely low interest rates,'' which ``will boost inflation in the end.'' The ECB's mandate is to maintain price stability, and the bank has a 2 percent inflation limit. Consumer price gains matched the bank's target last month after slipping below the rate in January, the European Union said on March 1.
``The euro will be supported by increasing evidence that interest rates are going to be raised,'' said Benedikt Germanier, a foreign-exchange strategist in Zurich at UBS AG, the world's biggest currency trader. ``Wellink believes they should raise rates sooner rather than later.''
Against the euro, the dollar slid to $1.3335, its weakest since Jan. 4, at 12:01 p.m. in New York, from $1.3214 late yesterday, according to electronic currency-dealing system EBS. The dollar fell to 104.57 yen, from 105.18.
The dollar dropped versus the yen after a government report showed the number of Japanese full-time workers increased for the first time since 1997, boosting optimism the world's second- biggest economy will pull out of last year's recession.
The U.S. currency also weakened against the South African rand and the Canadian, Australian and New Zealand dollars, so- called commodity currencies. Commodity prices reached a 24-year high today, according to the Reuters-CRB index.
The dollar's decline accelerated after the currency slid to $1.3285 per euro, a one-week low, triggering automatic orders to sell the dollar versus the European currency, said Robert Lynch, a currency strategist at BNP Paribas in New York.
UBS forecasts the dollar will decline to $1.36 per euro in three months. The bank expects the ECB to lift its key rate for the first time in five years in the second half.
``Wellink's comments are quite significant,'' said Bilal Hafeez, head of currency strategy at Deutsche Bank AG in London. ``An acceleration in money-supply growth does raise the prospect of the ECB raising rates in the second half of the year.'' Deutsche Bank, the second-biggest currency trader in Euromoney magazine's annual survey, forecasts the euro will rise to a record $1.38 in six months.
ECB President Jean-Claude Trichet said in a Frankfurt press conference on March 3 that it's ``clear for the full body of observers that at a time we will have to increase rates.'' Euro- region money supply, the ECB's gauge of future inflation, grew the most in a year in January, the bank said on Feb. 25.
The ECB has kept its benchmark rate at 2 percent, a six- decade low for the 12 nations sharing the euro, since June 2003. The median forecast of 29 economists in a Bloomberg survey published on Feb. 25 was for the bank to lift the rate to 2.25 percent in the fourth quarter.
`Supportive for Euro'
``What the market welcomed most was the notion that the next step would be upward, and that was supportive for the euro,'' said Armin Mekelburg, a currency strategist in Munich at HVB Group, Germany's second-biggest bank by assets. He forecasts the euro will reach $1.35 in two months.
The euro advanced even after European Union finance ministers failed to agree on a proposed relaxation of budget- deficit rules as Germany demanded greater scope for higher spending or lower taxes to spur the faltering economy.
The Federal Reserve has raised its target rate six times since June, in quarter-point steps, to 2.5 percent. The dollar fell 1 percent against the euro on March 4 after government figures showed the U.S. unemployment rate rose and average hourly earnings were unchanged last month, suggesting the Fed won't accelerate the pace of interest-rate increases.
Fed Governor Ben S. Bernanke, a voting member of the rate- setting Federal Open Market Committee, will discuss the economic outlook in Chicago at 2 p.m. New York time.
`Bearish' Dollar View
The dollar's drop after the jobs report was ``really disappointing,'' said BNP's Lynch. ``That reinforced what has already been some bearish dollar sentiment in the market.'' Lynch forecasts the dollar will weaken to $1.34 per euro by June 30.
Dollar declines today below $1.3280 per euro may pave the way for a further drop to $1.3385, said Andreas Mann, senior currency trader in New York at Commerzbank Securities, a unit of Germany's fourth-biggest bank. ``Technically it looks bad for the dollar,'' said Mann.
Commodity prices surged today. The Reuters-CRB rose to 312.46, the highest since December 1980. The index is up 10.6 percent this year after jumping 11 percent in 2004.
In Japan, the full-time workforce rose 0.8 percent in January from a year ago to 32.1 million workers, the first gain since September 1997, today's report showed. The government said Feb. 16 Japan last year slipped into its fourth recession since 1991, as the economy contracted for three straight quarters.
``We're looking for the economy to move out of a soft patch, dispelling the view the recovery is faltering,'' said Satoru Ogasawara, a currency strategist in Tokyo at Credit Suisse First Boston. ``Japanese data will point to a stronger yen.'' The yen may gain to 101 in three months, Ogasawara said.
Also today, a government report showed sentiment on the outlook for Japan's economy rose for a third month. The Economy Watcher's outlook index, which measures expectations for the next two to three months, rose to 49.9, its highest since September. The Cabinet Office's survey asks 2,050 people nationwide whether they think the economy is improving or deteriorating as well as their outlook for the economy in the coming months.
``The underlying conditions are improving,'' said Jeremy Stretch, a currency strategist at Rabobank Groep in London. ``This does suggest we will see an appreciation of the yen through the course of this year.'' Stretch said the yen may rise as high as 102 per dollar by the start of April.
A government report tomorrow may show Japan's index of leading economic indicators is signaling growth. The index probably rose to 55 in January, surpassing for the first month in five the 50 percent level that signals growth will pick up, according to the median of 27 forecasts in a Bloomberg survey.
Japanese Vice Finance Minister Hiroshi Watanabe said today that ``there are some concerns that the yen is still overvalued.'' The yen reached a five-year high of 101.69 per dollar on Jan. 17. Watanabe, the country's top currency official, said in a speech in Tokyo that ``if there are some abrupt moves we are very much ready'' to act.
U.S. Trade Deficit
Demand for the dollar may be limited before the Commerce Department's March 11 trade report, which probably will show the second-widest deficit ever. A wider gap means more dollars need to be converted to other currencies to pay for imports.
The gap between imports and exports grew to $56.8 billion from $56.4 billion in December, based on the median estimate of 57 economists surveyed by Bloomberg News, making the shortfallsecond only to the record $59.3 billion in November.
Record U.S. trade deficits may shrink, Fed Chairman Alan Greenspan said in London on Feb. 4, causing the dollar to gain the most in three weeks versus the euro. Fed Bank of Philadelphia President Anthony Santomero said on March 1 that growth in U.S. trading partners will help narrow the deficit.
``Greenspan and others have said the trade balance was going to improve; now we have to see that come to fruition,'' said Jake Moore, a currency strategist in Tokyo at Barclays Capital Inc. ``I'd anticipate the trade deficit to add to a drop'' in the dollar. Moore said the U.S. currency may decline to $1.33 per euro in the next few days.