Vast reserves of a declining currency are dangerous for Asian central banks


Dollar depreciates for third year;
deficit seen keeping downtrend intact in 2005

By Rachel Koning
Friday, December 31, 2004

CHICAGO -- The U.S. dollar suffered its third straight
year of decline, hampered by the weight of U.S.
deficits and an apparent willingness from the world's
financial powers to let the greenback fall.

The string of annual declines is the longest since the
late 1980s.

The dollar index, which measures the greenback
against eight of the world's chief currencies, hit
a fresh nine-year low earlier Friday at 80.42. The
index is down more than 7 percent from where it
stood at the close of 2003.

The dollar's fortunes aren't likely to change soon.

"It is usually unwise to read much into thin year-end
markets, but the new high in euro-dollar reached [this
week] is surely symptomatic of growing consensus that
the dollar downtrend has months more to play out,"
said David Gilmore, a partner in Connecticut-based
research firm Foreign Exchange Analytics, in a recent
research note.

"Record U.S. external imbalances require record lows
for the dollar. This is especially so when one considers
what little is being done to address low U.S. savings
and high foreign savings that drive the U.S. current
account deficit."

The current account deficit, a broad measure of trade
that includes investment flows, stands at nearly 6
percent of U.S. gross domestic product, its largest
share ever. To finance the gap, the United States must
draw ample foreign capital, which hinges on economic
health, interest rates, and foreign investor confidence
that deficits can be reduced.

So far, intervention by foreign central banks to prop
up the dollar, and lessen the burden on other economies
that trade with the United States, has been limited.

"U.S. policymakers' tolerance of a weaker currency
and market perceptions that no official coordinated
Group of Seven [industrial economies] action is
planned to rescue the greenback is keeping the U.S.
currency biased toward the downside," said Alex
Beuzelin, senior market strategist with Ruesch
International in Washington.

"Consequently, market sentiment is that the dollar
will be vulnerable to further losses as 2005 gets
under way."

Friday's trade was mixed, with the buck rising in
afternoon U.S. action against its major European
counterparts in a move traders said was largely
investors pocketing some of huge yearly run for
the euro, British pound, and Swiss franc. Low
volume after European traders left for the weekend
allowed for a quick reversal for the dollar.

The dollar was quoted up 0.6 percent against the
euro late Friday compared to where it stood
Thursday. One euro was fetching $1.3546, down
from the all-time high above $1.36 hit earlier this
week. The dollar is down roughly 7.6 percent
against the euro for all of 2004.

The dollar fell 0.5 percent against the Japanese yen
in thin pre-New Year's trading. On the year, the
dollar has shed 4.4 percent.

The dollar was valued at 102.63 yen Friday,
remaining near its lowest in nearly five years amid
speculation that Japan's monetary authorities could
let their currency appreciate in the near term,
foreign-exchange traders said. A richer yen can cut
the value of Japanese exports, which are still a
significant growth engine for the world's
second-largest economy.

Some economists argue that the dollar is simply in
the middle of what are typically three-to-seven year
cycles for the U.S. currency, which at current levels
has reclaimed only about half the gains achieved in
the late 1990s and early part of the new century.

Others insist a weaker dollar is the only means to
help reduce the U.S. trade deficit, even if it brings
short-term economic discomfort to U.S. consumers.

The dollar's losses this year have been even more
pronounced against other currencies.

The buck will finish the year down 7.4 percent against
the British pound, down 8.2 percent against the Swiss
franc and down 7.2 percent against the Canadian


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