Central banks remain the crucial factors in the currency markets

Section:

Dollar Halts Slide on Speculation
That Decline May Have Gone Too Far

By Rodrigo Davies and Mark Tannenbaum
Bloomberg News Service
Monday, November 29, 2004

http://www.bloomberg.com/apps/news?
pid=10000101&sid=aFPzElvSBHt8&refer=japan

NEW YORK -- The dollar's decline against the euro
stalled on speculation its move had gone too far
after it set eight record lows in a month and at least
seven banks cut their forecasts for the U.S.
currency in the past week.

The dollar last week also touched the weakest in
almost five years versus the yen. Japanese Finance
Minister Sadakazu Tanigaki said today in Tokyo the
yen's level "must be watched closely," slowing the
Japanese currency's nine-week rally.

"We're approaching taxi-driver territory -- when the
taxi driver is telling you the dollar is going to fall,
that means everyone is thinking it," said Adrian
Schmidt, head of currency strategy at Royal Bank
of Scotland Plc in London. "We've traveled far
enough here to have a bit of pause."

Against the euro, the dollar was at $1.3274 at 2:36
p.m. in New York, from $1.3296 late on Nov. 26,
according to electronic currency-dealing system
EBS. The U.S. currency reached a record low
$1.3330 per euro on Nov. 26. The dollar climbed
to 102.93 yen, from 102.60 on Nov. 26.

The dollar may gain as high as $1.3180 per euro
and 103.20 yen in the next week, said Schmidt at
Royal Bank of Scotland.

Traders also bought dollars as U.S. Treasury debt
slid, driving 10-year yields to the highest since
August. At 4.32 percent, U.S. 10-year yields were
about a half percentage point above those on
German 10-year government debt, the most since
May, raising the appeal of Treasuries and dollars.

With U.S. yields rising, "the spreads are starting to
move in favor of the U.S. dollar," said Hugh Walsh,
a currency trader in New York at Fortis (USA)
Financial Markets.

Banks including Barclays Capital and JPMorgan
Chase & Co. said in the past week the dollar will
fall more than previously estimated. One technical
indicator some traders use to predict swings in
prices also pointed to a stronger U.S. currency.

The euro's 14-day relative strength index, a measure
of how rapidly prices have risen or fallen in a given
period, stood at 73.3 today, and reached 79.4 at the
end of last week. The yen's RSI was 30.2 today, up
from about 26 three days ago. Levels above 70 and
below 30 signal a currency may change direction.

Euro-region, Swiss, and Japanese policy makers
today signaled concern about the dollar's decline
against their currencies. At a conference in Vienna,
European Central Bank President Jean-Claude
Trichet reiterated his view that "recent moves were
unwelcome" in the euro.

It is "not acceptable" to do nothing about the euro's
rise, Joaquin Almunia, the European Union's
commissioner of monetary affairs, said today. The
U.S. should curb the dollar's fall, he said.

"We do have a lot of non-U.S. speakers this week
who are expected to focus on the currency markets,
so there's going to be a lot of opportunity for stronger
verbal intervention to try to slow down the dollar's
decline," said Adam Myers, a currency strategist at
Societe Generale SA in Paris.

The dollar may advance past $1.32 per euro, he said.

Swiss National Bank President Jean-Pierre Roth said
in a speech in Jerusalem that a further appreciation in
the Swiss franc may "trigger" his bank to act. The franc
last week reached a nine-year high against the dollar.

Japan "will take proper steps as necessary" on the yen,
Tanigaki told reporters before meeting with
representatives of the Japan Business Federation in
Tokyo. The Japanese currency rose to 102.01 on Nov.
26, the highest since January 2000.

The dollar also gained amid expectations a government
report on Dec. 3 will show the U.S. economy created
195,000 jobs in November, according to the median
forecast in a Bloomberg survey.

The U.S. currency dropped the past seven weeks
against the euro amid concern about a record
current-account deficit. A cheaper currency may help
narrow the U.S. shortfall, which reached $166.2 billion
in the second quarter, by making imports more
expensive and exports cheaper.

Manufacturers including Toyota Motor Corp., the world's
second-largest automaker, said the yen's gains caused
a decline in profits in the quarter ended Sept. 30.

"Concern about Japanese action is slowing the yen's
advance," said Tomoko Fujii, a foreign-exchange analyst
in Tokyo at Citigroup Inc. Citigroup predicts Japan will
sell the yen before it advances to 100 per dollar.

The Bank of Japan, acting for the Ministry of Finance,
sold a record 32.9 trillion yen ($320 billion) in the fiscal
year through March, and hasn't sold since, according
to ministry data through October. The ministry tomorrow
will report on any sales in November.

The dollar may fall to between $1.35 and $1.40 per euro
and to between 90 and 95 yen before sparking any
coordinated effort to stem its decline, said Alex Patelis,
head of G-10 currency strategy at Merrill Lynch & Co. in
London. "We've not yet reached the level that would be
required for central banks to join globally in" such an
effort, he said.

"This dollar decline would have to spill over into U.S.
assets -- something like a decline in stocks, bonds, and
the dollar at the same time," before it spurred concern
among U.S. policy makers, Patelis said.

"We're far from a crisis" in the dollar, said Edwin Truman,
former assistant U.S. Treasury secretary and now a
senior fellow at the Institute for International Economics
in Washington. The dollar was weaker in the mid-1990s
against the German mark, the euro's predecessor, he
said.

The dollar now equals 1.4727 German marks, and fell as
low as 1.3455 in 1995.

The euro will rise above $1.40 within 12 months, said
Klaus Zumwinkel, chief executive officer at Deutsche
Post AG in Bonn.

Barclays today predicted the dollar at $1.35 per euro
in three months and $1.28 in six months, compared
with earlier targets of $1.32 and $1.25. JPMorgan last
week projected a yen rise to 100 per dollar at the end
of this year, from 103 previously.

Speculators' net futures bets on euro gains against
the dollar reached a record 57,529 in the week through
Nov. 9, falling to 54,028 in the following week, according
to data from the Commodity Futures Trading Commission.
The most recent statistics will be released today.

The majority of traders predicting the dollar will extend its
drop may suggest the opposite will happen, said Jim
O'Neill, head of global economic research at Goldman
Sachs Group Inc. in London. The euro is "beginning to
feel overbought" and probably won't end the week stronger
than $1.33, he said.

Saudi Arabia, the world's largest oil exporter, plans to
expand output capacity by 14 percent to avert shortages
as demand rises, Ali al-Naimi, the nation's oil minister
said, without giving specifics.

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