07 January 2004

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Minister says rise is tolerable, dollar slides to record low

The dollar weakened beyond USD1.28 against the euro for the first time, extending a loss of almost five percent in the last month, after Belgian Finance Minister Didier Reynders said the euro's rise "is not a problem."
"We can have a strong euro with a strong economy," Reynders said in a recent interview Brussels. His remarks followed comments the past two days by US Federal Reserve officials suggesting they aren't concerned the dollar's decline will ignite inflation.
"This gives the markets the green flag to keep on selling the dollar," said Adam Cole, a senior currency strategist in London at Credit Agricole Indosuez SA.
Against the euro, the dollar fell to USD1.2768 at 9:53 a.m. in New York from USD1.2677 late Monday, according to EBS prices. It fell to as low as USD1.2812. The dollar may slide to USD1.30 within a month, said Cole. The euro rose 20 percent against the dollar last year; in the last month it has gained more than five per cent.
Demand for the dollar has waned as US interest rates stay lower than in Europe, discouraging some international investors from buying debt sold to finance a record US budget deficit.
The US is "clearly not attracting as much capital as it did" even six months ago, said Joseph Portera, who helps manage USD7 billion of bonds at Mackay-Shields Financial Corp in New York. "Rates are higher in Europe."
The Fed's benchmark rate, at a 45-year low of 1 percent, is half that of the European Central Bank. The yield on the 1 7/8 percent US Treasury note maturing in December 2005, more sensitive than longer-maturity debt to changes in the central bank's rate, was 1.88 percent, compared with 2.52 percent for the German note of similar maturity.
Testing a barrier
The euro also rose after a German economic institute said a euro advance to USD1.30 would be "difficult" for German exporters. Silke Tober, an economist at the Berlin-based DIW institute, said the European Central Bank should lower its benchmark rate by a percentage point from 2 percent currently should the euro rise to between USD1.30 and USD1.35.
"The more European officials and business leaders comment about key levels such as USD1.30, the more interested the market is in testing to see what happens if those levels are breached," said Greg Anderson, senior foreign exchange strategist at ABN Amro Inc. in Chicago.
Atlanta Federal Reserve President Jack Guynn Monday suggested the central bank won't raise interest rates from a four- decade low soon. The economy may grow 4 percent this year and there is little sign of a "significant" increase in inflation that would lead to higher rates, Guynn told the Rotary Club of Atlanta.
Fed Governor Ben S. Bernanke said on Sunday rates can stay low because prices aren't rising quickly and the labor market remains weak.
Japan acts again
Compared with the yen, the US currency was little changed at 106.18 after the Bank of Japan sold yen to stem the Japanese currency's appreciation for a second day, said traders at banks that deal with the BOJ.
"We will act as needed to counter speculative movement," Zembei Mizoguchi, Japan's vice finance minister for international affairs, told reporters in Tokyo earlier today. "There is a need for us to respond to this with determination."
The central bank sold yen at about 7:10 a.m. London time after it rose to about 106.09, the strongest since September 2000, said the traders, who spoke on condition they not be further identified.
"If it wasn't for the Bank of Japan, dollar-yen would be something like 95," Steve Pearson, chief currency analyst in London at HBOS Treasury Services Plc, said in a televised interview. "They're spending their money to try to insulate the economy from the worst effects of the bear market for the dollar."
In other trading, the British pound rose to an 11-year high of USD1.8225 against the dollar. The Bank of England, whose benchmark rate is 3.75 percent, last year became the first of the world's four largest central banks to raise rates since 2000.
Guynn, who doesn't vote on rates this year, said the current Fed target rate is "very accommodative." While the Fed will eventually have to consider raising it, "I want to emphasize that I see little threat that inflation is poised to rise significantly."
Consumer prices excluding food and energy fell 0.1 percent in November, the first decline in 21 years, a government report last month showed. From a year earlier, prices rose 1.1 percent.
"The weakness of the US dollar is exactly what the Fed and the US administration like and want to continue," said Peter Clay, currency strategist in Sydney at ABN Amro Holding NV. "Anytime a Fed official comes out and says `time is on our side' regarding rates, it is going to weigh on the dollar."
US Treasury Secretary John Snow said last month the currency's drop had been "orderly." While he and President George W. Bush regularly endorse a "strong dollar" they say they want markets to set exchange rates.
Yen selling
Any gain in the yen to beyond 106 per dollar may stall on speculation Japan will sell its currency to prevent a stronger yen from undermining the nation's economic recovery.
"It's just a matter of time before the yen gains to above 106," said Tohru Sasaki, a currency strategist in Tokyo with J.P. Morgan Chase & Co., and a former BOJ official. "That will probably prompt Japanese authorities to step up efforts to protect 105."
Japan spent a record 20.1 trillion yen (USD189 billion) last year through Dec. 26 to stem the yen's rise because a stronger local currency erodes the value of overseas sales of exporters when earnings are converted into yen.
The yen may gain beyond 106 within two days, before trading at about 105.50 over the following few weeks, Sasaki said.
A further strengthening of the yen will cause Japan's economy to suffer, according to Hiroshi Okuda, head of Japan's largest business lobby.
"At 105 yen to the dollar or more, Japan's economy will find it hard to cope," Okuda, chairman of the Japan Business Federation, said at a press conference in Tokyo. Okuda is also chairman of Toyota Motor Corp., the nation's largest carmaker.
Services industries
The euro remained near a record against the dollar even as European services, which make up more than half the region's economy, expanded less than expected in December.
The index, based on a survey of 2,000 companies for Reuters Group Plc, slipped to 56.6 from November's 57.5. The median forecast of economists surveyed was for a gain to 58. A reading above 50 indicates expansion.
Investors today will look to a report on the US services industry, slated for release at 10 a.m.
The measure of retail, financial services, construction and other non-manufacturing businesses may have climbed to 61 from 60.1 in November, based on the median estimate of 46 economists surveyed. Readings greater than 50 indicate that more companies reported business growing than shrinking.

Copyright © Newsworks Ltd. Malta.
Editor: Saviour Balzan
The Malta Financial & Business Times, Newsworks Ltd, Vjal ir-Rihan, San Gwann
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