Even if IMF sold gold, it probably would remain in government hands

Section:

By Rodrigo Davies
Bloomberg News Service
Tuesday, February 8, 2005

http://www.bloomberg.com/apps/news?
pid=10000100&sid=aA6F1ffAjpUQ&refer=germany

The dollar climbed to an almost two-month high against the yen after
Federal Reserve Governor Susan Bies said the United States is
attracting a "tremendous amount" of investment.

The dollar is up 3 percent against the yen and 6.2 percent versus
the euro this year. The U.S. currency is being buoyed by prospects
for higher interest rates and predictions by Fed Chairman Alan
Greenspan that the record U.S. current-account and fiscal deficits
may narrow, said traders such as Hugh Walsh at Fortis (USA)
Financial Markets in New York.

Fed officials "don't seem to be as concerned about the current
account; that's one of the reasons you've seen the rally in the
dollar," said Walsh, whose firm is a unit of Belgium's biggest
financial-services company. "This rally might continue" to $1.24 per
euro and 109 yen in a month, he said.

Against the yen, the dollar rose to 105.70 yen at 3:08 p.m. in New
York, from 104.84 late yesterday, after reaching 105.95, the
strongest since Dec. 10, according to electronic currency- trading
system EBS. It traded at $1.2773 per euro, from $1.2756 yesterday,
when it reached $1.2732, the strongest since Nov. 3.

"There's been a pretty strong rally in the dollar and that's caused
a lot of people to shift back into selling the yen," said Derek
Halpenny, a currency strategist at Bank of Tokyo Mitsubishi in
London.

The bank on Feb. 1 lifted its forecasts for the dollar after the
currency in January had its best month against the euro since 2001
and the biggest gain versus the yen since July. Halpenny said the
U.S. currency may gain to 106 yen and $1.2620 per euro this week.
UBS AG, the largest currency trader, yesterday raised its dollar
estimates.

Bies said in a speech late yesterday that the U.S. attracts "a
tremendous amount of foreign direct investment." Greenspan said on
Feb. 4 in London that "market pressures" may help "decrease the U.S.
current-account deficit and its attendant financing requirements."

Bies's was "another upbeat remark in a time when the dollar is quite
buoyant; it adds fuel to the fire," said Tom Molloy, a currency
trader at Bank Leumi USA. "The Fed is definitely more relaxed" about
the dollar and deficits. The dollar may rally another 2 percent in
the next month, he said.

"It has more room to go," potentially to $1.2625 in the next few
days, said John McCarthy, a director of currency trading in New York
at ING Financial Markets LLC. Greenspan's remark last week "takes
the foot off the accelerator of selling dollars."

The value of foreign-owned U.S. assets, including purchases of
stocks and bonds and direct investment in businesses and real
estate, rose by $286.4 billion in the third quarter after a $270.7
billion increase in the previous three months, government statistics
show.

The dollar will probably extend its rally against the euro, until it
reaches the 200-day moving average for the exchange rate, currently
about $1.2565, said Brian Taylor, chief currency trader at
Manufacturers & Traders Trust Co., and Tom Fitzpatrick, chief
technical analyst at Citigroup Inc. in New York.

"It may take a week, but I think that's where the decline will
end," said Taylor, based in Buffalo, New York. At about
$1.25, "people will start looking to buy euros."

UBS yesterday boosted forecasts for the dollar, saying it will
probably gain further after rallying in January. The bank raised its
projections to $1.27 per euro in one month and $1.30 in three
months, from $1.34 and $1.36 respectively. The dollar may rise as
high as $1.2485 per euro in the next three months, UBS said.

Japan's currency fell to 134.99 per euro from 133.75 yesterday,
after Chinese central bank Governor Zhou Xiaochuan said China's
currency isn't undervalued, in an interview with state-run Xinhua
News Agency. A stronger yuan would make China's exports costlier.

Zhou's comments came two days after a meeting of the Group of Seven
nations in London ended without an indication from China that it's
close to relaxing its decade-old peg to the dollar.

"Dollar buying against Asian currencies is going to continue this
week," said Adam Myers, a currency strategist at Societe Generale SA
in London. "There are a lot of people that are long on the yen and
still haven't cut their positions but if the move goes much further
they'll be selling."

The dollar may climb to 107 yen in two weeks, though U.S. trade
figures this week could undermine the rally, he said.

Government statistics on Feb. 10 will probably show the U.S. trade
deficit narrowed in December for the first time since September, to
$57 billion from a record $60.3 billion in November, according to
the median forecast of 65 economists surveyed by Bloomberg News.

"The longer-term trend is still for the trade deficit to remain a
significant negative for the dollar," said Steve Barrow, a currency
strategist at Bear Stearns Cos. in London. "It doesn't matter what
Greenspan or Bush says about the current account or the budget
deficit."

Barrow projects the dollar will decline this year to a record $1.45
per euro and to 90 yen, the weakest in 10 years.

President George W. Bush yesterday proposed a budget for the 2006
fiscal year, which begins Oct. 1, that would reduce the fiscal
deficit by 8.7 percent from an estimated record $427 billion this
year.

Record current-account and budget deficits helped spur three
straight annual declines in the dollar against the yen and the euro
through 2004. The current-account gap was $164.7 billion in the
third quarter. The gap means the United States must attract about
$1.8 billion daily to compensate for the shortfall and maintain the
dollar's value, according to Bloomberg calculations.

The U.S. central bank on Feb. 2 lifted its target rate for the sixth
time since June to 2.5 percent. By contrast, the European Central
Bank has kept its benchmark at 2 percent since June 2003 and the
Bank of Japan has left its main rate near zero since 2001.

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