November 25, 2006

“To dismiss this as a technical correction is to overlook the structural reasons why the U.S. dollar is having a very hard time these days,”

It's really easy to ignore this sort of stuff...but we do so at our peril.

Dollar Falls Sharply Against Euro and Pound

The dollar dropped sharply yesterday against a range of major currencies, with the euro breaking through $1.30 for the first time in a year and a half. The fall highlighted concerns about softness in the American economy as economies abroad continue to expand.

The currency sell-off came as investors weighed a number of issues that complicate the prospects of the United States in the coming months, including a huge trade imbalance with China and a slowing domestic housing market. On top of that, economic growth in some European countries is gaining momentum, threatening to siphon investment away from the dollar.

[...]

“To dismiss this as a technical correction is to overlook the structural reasons why the U.S. dollar is having a very hard time these days,” said Hans Redeker, global head of currency strategy at BNP Paribas in London.

Economists say the United States is in a vulnerable position compared with its global competitors. While the most recent data show that the trade imbalance tightened in September, the decline was largely a result of falling oil prices. The deficit between what Americans import and export was a negative $586.2 billion for the first nine months of the year, and it remains on track to break last year’s record of a negative $716.7 billion. The biggest chunk by far represents imports from China.

[...]

Analysts said that the dollar’s drop yesterday, which was accelerated by orders from traders to sell automatically once it fell past $1.30 against the euro, reflected a growing anxiety over Chinese economic policy. China’s central bank holds a large amount of American currency, and speculation has intensified recently that it could begin selling off dollars to avoid being burned if the dollar collapses.

Also lurking behind the dollar’s depreciation is the rising probability, in the view of some economists and currency investors, that a slowing American economy will force the Federal Reserve to begin cutting borrowing costs next year.

Against the backdrop of a European Central Bank that seems determined to tighten rates further next year, the appeal of dollar-denominated assets is falling as the prospect of higher returns in Europe rises.

More at link.

No comments: