Deficit seen keeping dollar in downtrend during 2005

Section:

Europe 'Will Have to Act on Dollar'

By Edmund Conway
The Telegraph, London
Saturday, January 1, 2005

http://www.telegraph.co.uk/money/main.jhtml?
xml=/money/2005/01/01/cnecb01.xml&menuId=242&sSheet=/money/2005/01/01/
ixcity.html

The European Central Bank will this year be forced
to intervene in the foreign exchange markets,
economists predicted yesterday, as the dollar
narrowly avoided hitting a new all-time low against
the euro.

The Bank will either drastically increase the number
of euro banknotes in circulation or cut interest rates
to prevent the currency pushing much further above
the $1.40 mark, warned Rob Carnell of ING Financial
Markets.

He was speaking as the single currency pulled itself
off intra-day highs against the dollar to finish its
last trading session of the year down three quarters
of a cent. Sterling strengthened a touch against the
euro, narrowly avoiding hitting a new low.

The FTSE 250 index of mid-sized UK companies ended
the year at a more than four-year high, rising 13.7
points to 6936.8, although the benchmark FTSE 100
had slipped 5.8 points to 4814.3 when trading ended
yesterday.

Currency traders said they expected the dollar to
plunge further in the new year, weighed down by
concerns about the size of the US budget and current
account deficits. Although President Bush pledged to
remedy both, economists expect the balance on the
current account to worsen, further eroding the
dollar's strength.

Mr Carnell said it seemed unlikely Asian countries
would release their currencies from dollar pegs. "The
effects of the tsunami in southeast Asia will probably
reinforce their commitment to keep their own
currencies stable," he said. "We don't expect the euro
to rise much beyond $1.40 because we don't believe
that the ECB will allow it to go that way."

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