The Gartman Letter shifts from denial to preferring not to know


By Steve Johnson
Financial Times, London
Saturday, October 23, 2004

After months of relative torpor the currency market
burst into life this week as the pressures building on
the U.S. dollar finally forced the greenback to crack.

The dollar spiralled out of the tight trading range of
$1.18-$1.25 against the euro that had prevailed since
March, ending the week 1.2 percent weaker at
$1.2630, not far from February's seven-year low of
$1.2930. The greenback slumped to similar lows
against a broad basket of currencies, registering
an eight-month low in trade-weighted terms.

The dollar's decline was kick-started by soft
economic data but soon deviated from the
fundamentals as the market began to worry about
the repercussions of oil prices staying higher for
longer than expected.

High oil prices will reduce growth across the globe,
with some studies suggesting the eurozone is
actually more vulnerable to this threat than the
United States.

Nevertheless, it is the United States, where
expectations of solid growth have been factored
into equity prices and interest rate expectations,
that has borne the brunt of the fears. These fears
are made more acute still by evidence this week
showing the vast U.S. current account deficit, some
5.7 percent of gross domestic product, is now only
just covered by inward portfolio flows.

A big slowdown in the United States could persuade
overseas investors to cut their exposure to Wall
Street, making it harder still for the United States to
cover its external deficit and prompting a further
downward spiral for the dollar.

Simon Hayley, senior international economist at
Capital Economics, said: "The United States needs
4 percent growth to justify equity prices. Anything
below that will drive flows the other way." He sees
the dollar sliding to $1.40 against the euro during
2005. A tight U.S. presidential race, exacerbated by
concerns that the losing side will launch a potentially
drawn-out legal challenge, induced further jitters.

Lurking in the background was the suggestion that
the Federal Reserve was talking the dollar lower, a
notion that gained credibility as Janet Yellen, San
Francisco Fed president, said the dollar was still
"relatively high despite our large and growing trade
deficit" even as the greenback headed south.

With momentum-driven hedge funds jumping on
board to exploit the dollar's exit from well-worn
ranges, the greenback fell 1.3 percent over the week
to a two-month low of $1.8269 against sterling, 1.6
percent to a four-month low of Y107.44 to the yen,
and 1.2 per cent to SFr1.2170 against the Swiss
franc, an eight-month low.

The greenback's weakness also encouraged
speculators to rebuild dollar-funded carry trades
to chase attractive bond yields elsewhere, enabling
the Australian dollar to rise 1 percent to $0.7385
against its U.S. namesake, the New Zealand dollar
to gain 1.1 percent to $0.6936,
and the rand to jump 3.6 percent to R6.18, the latter
helped by surging gold prices and a credit rating
upgrade for South Africa.

The NZ dollar's rally came in spite of Michael Cullen,
finance minister, saying he was "not entirely
comfortable" with its strength.

This crystallised the week's other big talking point --
that renewed dollar weakness could restart the
"currency wars" seen earlier in the year, with
governments and central banks using verbal and
actual intervention to stop currencies becoming too

Japan, which spent Y15,000bn in the first quarter of
2004 to weaken the yen, is seen as one contender
for actual intervention. Ministers have said they are
monitoring events, while the Bank of Japan has
telephoned banks to determine who is trading the
yen. But with a firm currency a useful tool to help
combat rising commodity prices, Japan is not
expected to act unless the dollar falls to Y105.

"Policymakers should be less resistant to a weak
dollar this time," said Jim McCormick, global head
of FX research at Lehman Brothers. "Inflation has
picked up globally, thanks in part to the spike in oil
prices, and Asia's recovery has continued to mature,
which means that more growth is coming from
domestic demand and less from exports."


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