Newspaper says Chinese banks may be allowed into dollar market

Section:

Dollar Under Pressure
in Heavy U.S. Data Week

By Don Curren
Dow Jones Newswires
Sunday, November 28, 2004

http://sg.biz.yahoo.com/041128/15/3ovpz.html

TORONTO -- After its wrenching fall against the euro
and other currencies, the dollar will likely remain
under selling pressure this week amid a slew of
top-tier economic data.

While the well-entrenched downtrend in the dollar will
remain the dominant factor in global currency
markets, the sharpness of its recent declines makes
a temporary rebound a distinct possibility, analysts
said.

The dollar declined by almost 2 percent against the
euro last week, with the euro easily holding above
$1.30 and hitting a series of record highs, the latest
being $1.3329 on Friday.

Late Friday the euro was at $1.3291, up from
$1.3242 late Thursday. The euro was also climbing
against the yen, reaching Y136.31, from Y135.80 late
Thursday. The dollar was at Y102.55, little changed
from Y102.53, and had dipped to Y102.14 overnight.
The dollar was also at CHF1.1382 from CHF1.1412.
Sterling was at $1.8964, from $1.8884 on Thursday.

If the dollar continues its rapid descent against the
euro, the European currency could reach as high as
$1.3500 this week, some analysts said. On the
downside, the $1.3000 level offers psychological
support for the euro. Against the yen, the dollar will
likely find support at Y102, although that level could
crumble just as quickly as $1.3000 did against the
euro.

A week of active trading is likely, with a busy
schedule of U.S. economic data releases, including
the key November nonfarm payrolls report on Friday.
This week "is going to be the busiest week in the
remainder of the year," said Tim Mazanec, senior
currency strategist at Investors Bank & Trust in
Boston.

Trading is expected to be volatile, with the market
remaining acutely sensitive to any indication central
banks in China and elsewhere are changing their
intentions regarding U.S. dollar assets. A report on
Friday, subsequently denied, saying China was
reducing its massive holdings of U.S. Treasurys
was responsible for a sharp spate of weakness in
the dollar in overnight trading.

Yu Yongding, an advisor to the People's Bank of
China, was quoted by China Business News as
saying the rate of growth in China's $180 billion
Treasury holdings has slowed this year and China
has been reducing dollar-denominated assets in its
foreign reserves.

Yu later told Dow Jones Newswires his comments
were based on public information available from the
U.S. rather than his knowledge as an adviser to the
central bank. He stressed that he has no personal
information about the composition of China's foreign
reserves, the management which is a closely
guarded secret in China.

Still, it's easy to see why markets reacted. Japan
and China are respectively the largest foreign holders
of U.S. Treasurys, much of which they buy with
dollars weaned from intervening in currency markets
-- in Japan's case to support the dollar, and in China's
case to manage its foreign exchange regime. In so
doing, they have helped keep U.S. interest rates low
and played a large role in financing the deficit in the
U.S. current account. Any indication that they would
cut their U.S. debt holdings would hurt Treasurys
and the dollar.

Concerns about the sustainability of the unwieldy
deficit -- currently running at close to 6 percent of
gross domestic product -- have been a big factor
behind the dollar's resumed burst of weakness of late
and along with the fiscal deficit, will remain a dominant
theme.

"The path of least resistance for the dollar is down in
the short term because traders and money managers
believe that a weaker dollar has become a one-way
bet," Montreal-based BCA Research noted in a report.
"Concerns over the twin deficits in the U.S., and the
perception that the Bush administration and the
Federal Reserve want a weaker currency, will keep
downward pressure on the dollar for the time being."

Still, the report also cautioned that a corrective
rebound by the dollar might be imminent. "(We)
recommend that clients not add to short dollar
positions because the foundation is being laid for
a countertrend rally in the dollar," the BCA report
said.

If the euro doesn't push through the $1.3500 area
early in the week, traders may settle in to wait for the
November nonfarm payrolls data on Friday, Investors'
Mazanec said.

Economists expect a payrolls gain of about 200,000
in November, following October's impressive increase
of 337,000. While a weak result could be calamitous
for the dollar, a strong result may not bolster the
beleaguered currency. Indeed, in recent weeks the
dollar has been much more influenced by concerns
about structural imbalances in the U.S. economy than
anything, positive or negative, on the economic front.

Other significant U.S. data include personal income
and spending data for October and the Institute of
Supply Management's manufacturing index for
November on Wednesday.

Fed officials also will be active during the week,
with San Francisco Federal Reserve President Janet
Yellen speaking on Wednesday on the U.S. economic
outlook and Federal Reserve Governor Ben Bernanke
speaking on monetary policy on Thursday.

European Central Bank President Jean-Claude Trichet
is speaking on European economic integration on
Monday and addressing the Economic and Monetary
Affairs Committee of the European Parliament on
Tuesday. Last Friday, Trichet once again spoke out
against the euro's rally, saying that "recent moves on
the exchange markets between the dollar and the euro
are unwelcome."

European officials have been attempting to talk the euro
down, but with little success thus far. Similarly, Japanese
officials will likely engage in "jawboning" efforts to slow
the appreciation of the yen this week. Verbal activity,
but no active intervention in currency markets, is the
likeliest response from Japanese officials to strength in
the yen, Mazanec said.

"At this point in time, going long yen doesn't seem to be
much of a losing cause," he said. "The fear factor is not
there."

Despite the yen's move to multi-year highs, the Bank of
Japan, which intervenes on behalf of the government,
hasn't been seen in currency markets. In fact, Japan
hasn't intervened since the first quarter.

Meanwhile, the Canadian dollar may suffer from a
perception that Bank of Canada may not raise interest
rates on Dec. 7.

"I think we're going to see the Canadian dollar
underperform," said Marc Levesque, chief strategist for
North American foreign exchange and fixed income at
TD Securities in Toronto. "It doesn't mean that you won't
get the Canadian dollar to continue to appreciate,
depending on the speed at which the U.S. dollar loses
ground."

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