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China''s banking system may be more corrupt than that of U.S.
FOREX VIEW: Dollar Rise
Should Continue, But Risks Lurk
By Laurence Norman
Dow Jones Newswires
Monday, June 6, 2005
http://sg.biz.yahoo.com/050605/15/3sub0.html
NEW YORK -- For the natural pessimists out there, there is choice
aplenty in the foreign exchange market.
It would be very rational to bet against the euro, besieged as it is
by political uncertainty and anemic growth in the euro zone. The
euro has fallen heavily for much of 2005. Those declines turned into
a landslide last week, as the French and Dutch voted "no" in
referendums on the European Union constitution.
Equally, pessimists could espouse troubles for the dollar, whose
ascent has already outlasted most analysts' expectations and which
could feel the lash from upcoming U.S. trade numbers. After all, a
Dow Jones Newswires survey this week showed most leading banks still
see fresh declines as a matter of time, though they're more bullish
for the near term.
For the moment, the market leans clearly toward more gains for the
dollar. Nonetheless, with risks such as the meeting of finance
ministers from the Group of Seven rich nations on Friday and two
speeches from Federal Reserve Chairman Alan Greenspan in the offing,
it could be a choppy, volatile week, analysts say.
Late Friday in New York, the euro was at $1.2216, down from $1.2284
late Thursday. It had briefly gone as high as $1.2340 immediately in
the wake of a disappointing U.S. nonfarm payrolls report. The dollar
rose to Y107.80 from Y108.27 and to CHF1.2536 from CHF1.2516. The
pound slipped to $1.8123 from $1.8190 and the euro was at Y131.71,
down from Y132.87.
Last week, the euro lost 2.9% versus the dollar and 3.0% versus the
yen. The single currency has lost 6.5% versus the dollar since April
22. During the week, the dollar hit an eight-month high against the
euro, the pound and the Swiss franc. The euro also plummeted to a
nine-month low versus the yen.
The euro's losses came mainly as a result of the French and
Dutch "no" votes. The results exacerbated growing concerns about the
European Union, its enlargement and integration. Just days after
German Chancellor Gerhard Schroeder called for early elections,
French President Jacques Chirac was forced by the "no" vote into
forming a new government. The "no" votes also convinced traders that
the euro zone's biggest economies were even less likely to push
through market-friendly reforms.
All this came as the European Central Bank kept rates at 2%, marking
the second anniversary of steady rates. In a press conference, ECB
officials again slammed the door on the idea of cutting rates to
boost the sluggish economy.
Charles Shioleno, foreign exchange analyst at Lehman Brothers in New
York, said that for the moment, traders will stay focused on the
E.U. political problems and will be keen to sell the euro. "There's
still risks around the euro without question," he said. "I think
that's what's weighing on the market right now. ... This is largely
a euro story."
...Dollar Risks Lurk But Yen, Not Euro, Stands To Gain
Sophia Drossos, currency strategist at Morgan Stanley in New York,
agreed. Drawing on what happened after Friday's poor jobs report,
she said the momentum behind a weak euro remains such that any bad
news for the dollar will likely be seized upon as a chance to buy
the currency more cheaply. "I think that any sort of rally in the
euro is going to be short-lived," she said.
Drossos said the euro could fall to $1.20, and that in a worst-case
scenario for the dollar, it could lift to $1.2450.
However, Sean Callow, currency strategist at IdeaGlobal in New York,
said there are "event risks ... jammed up later in the week" for the
dollar. He said Greenspan's testimony to Congress Thursday will be
closely watched to see if the Fed chairman gives any hint that rate-
tightening may be nearing an end.
Treasury yields fell hard last week, getting an additional push
after the government said nonfarm payrolls grew only 74,000 in May,
against the consensus expectations of 185,000. They rebounded
sharply by the end of the day Friday though.
Still, the bond market -- and by extension currency markets -- will
pay close attention to the Fed chairman, who speaks via satellite
Monday evening New York time to a central bankers conference in
China.
On Friday, the U.S. reports April's trade balance, with the market
expecting a widening of the deficit to $58 billion after March's
surprise narrowing to $55 billion. In recent months, the dollar has
been less sensitive to concerns about the ballooning trade and
current account deficit. However, if sentiment has already turned on
the dollar, the trade data could hit the currency.
Friday also sees the start of the G7 meeting, though with central
bankers not attending and with the dollar no longer under heavy
pressure, the event has garnered little market attention.
Nonetheless, the combination of the G7 get-together and Greenspan's
speech to the Beijing conference could mean a renewed focus on calls
for China to revalue the yuan.
That's one reason Callow believes the yen may be better placed to
take advantage of any turn in market sentiment against the dollar
this week. He notes that Japan has received net capital inflows
recently after a long period of heavy outflows. With the economy
showing signs of perking up and the yen suffering none of the
political risk associated with the euro, traders may prefer to buy
the yen if the going gets tough for the greenback.
It was notable that the yen was essentially steady versus the dollar
last week, even while the U.S. currency swept higher against its
European counterparts. A string of Japanese data, including leading
indicators, consumer confidence, bank lending and the current
account balance could be a catalyst for yen buying.
Callow sees the dollar trading between Y108.70 and Y106.50, while he
sees the euro trading between $1.20-$1.23. Drossos sees the dollar
between Y107-Y109.
Also this week, the Bank of England, the Reserve Bank of Australia,
and the Reserve Bank of New Zealand will hold interest rate
meetings. None are expected to change rates. The U.S. reports April
wholesale inventories and May import prices this week.
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