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Section: Daily Dispatches

Dollar Drops to Record;
UBS, JPMorgan, Merrill Lower Forecasts

By Rodrigo Davies and John Brinsley
Bloomberg News Service
Thursday, November 25, 2004

The dollar fell to $1.32 per euro for the first time and
dropped to a 4 1/2-year low against the yen as UBS
AG, JPMorgan Chase & Co,. and Merrill Lynch & Co.
lowered their forecasts for the U.S. currency.

"For each currency you have to ask what is the biting
point when the negative impact of the currency
appreciation will dominate," said Alex Patelis, Merrill's
head Group of 10 currency strategist in London. "For
Europe that is somewhere between $1.35 and $1.40,
and for Japan it's 90 and 95 yen."

The dollar fell to $1.3221 per euro at 12:12 p.m. in
London, from $1.3186 late in New York yesterday,
according to electronic currency-dealing system EBS,
after reaching a record $1.3236 earlier. It was also at
102.53 yen, from 102.79, after dropping to 102.40, the
weakest since March 2000.

All three banks predict the record deficit in the U.S.
current account, the broadest measure of trade, will
undermine the U.S. currency. A wider gap means
more dollars need to be converted to other currencies
to pay for imports. The dollar will extend its slide on
expectations policy makers will fail to halt its decline,
according to Merrill and JPMorgan.

The three firms account for 22 percent of the $1.9
trillion-a-day currency market, according to
Euromoney magazine. Merrill yesterday cut its March
forecasts for the dollar to 96 yen and $1.39 from 100
and $1.33. JPMorgan today cut its estimates to 96
yen and $1.37 per euro in March, from 100 and $1.30

UBS, the world's largest currency trader, lowered its
three-month dollar projections yesterday to 103 yen
from 107, and to $1.36 per euro from $1.30.

"The dollar has to fall to a level where policy makers
start to say enough is enough, but we don't believe
that is going to happen for some time," said Paul
Meggyesi, a currency strategist at JPMorgan in

Business confidence in Germany, Europe's largest
economy, fell to the lowest in more than a year in
November. The Munich- based Ifo institute cited the
euro's climb as a threat to growth. The group's
confidence index fell to 94.1, the lowest since
September last year, from 95.3 in October.

European Central Bank officials haven't protested
the dollar's drop since Nov. 19. The same day,
Federal Reserve Chairman Alan Greenspan said
foreign investors may cut purchases of U.S. assets
given the record current-account deficit. Since then,
the dollar has fallen almost 2 cents against the euro.

"A lot of people have been expecting some kind of
intervention or some kind of technical recovery for the
dollar and that's not happening," said Joachim Schuetz,
chief economist at UBS in Zurich. UBS expects Japan
will sell its currency to slow the yen's gains,
something it hasn't done since March.

The dollar extended its drop after International Monetary
Fund Managing Director Rodrigo de Rato said the U.S.
needs to narrow its current-account gap. Global
imbalances are driving the dollar's slide, he said in a
speech today in Valencia, Spain. The U.S. deficit was
a record $166.2 billion in the second quarter.

"Sentiment is very, very dollar negative and in this kind
of market it doesn't even take significant new bad news
to push the dollar down," said Rizwan Din, a currency
strategist in London at Barclays Capital. "Around $1.32
was a bit of a trigger level" for the dollar, and "$1.3350
would probably be the next target" for traders, Din said.

Trading may be less than usual today because of the
U.S. Thanksgiving Day holiday, which may give Japan
an opportunity to heighten the impact of any sales of
its currency, said Kikuko Takeda, a manager of foreign
exchange at Bank of Tokyo Mitsubishi Ltd. in Tokyo.

Japan will stabilize the yen's exchange rate if the level
doesn't reflect economic fundamentals, said the
government's chief spokesman, Hiroyuki Hosoda, in
Tokyo today.

"There's no doubt the yen's advance looks rapid in the
eyes of the authorities," said Takeda at Bank of Tokyo
Mitsubishi. The yen may fall to 103.70 per dollar this
week, she said.

Bank of Japan Governor Toshihiko Fukui said
foreign-exchange rates won't soon affect the Japanese
economy, Nikkei English News reported. Fukui also
said the currency market lacks stability, according to
the news agency. The bank sold a record 32.9 trillion
yen ($320 billion) in the year ended March 31,
according to Ministry of Finance data.

A government report today showed Japanese exports
rose 11.8 percent from a year ago to a record in
October, even as the yen that month rose to its
strongest against the dollar since April.

Bayerische Motoren Werke AG, the world's
second-largest maker of luxury cars, says it's "relaxed"
about the rise of the euro because it has hedged part
of its risk for next year, said Marc Hassinger, a
company spokesman, reiterating comments made by
Chief Financial Officer Stefan Krause earlier this month.

U.S. policy makers are unlikely to be concerned about
the dollar's decline unless it spurs a selloff in U.S.
Treasury securities and stocks, said Patelis at Merrill.

The benchmark U.S. 10-year Treasury note yields 4.19
percent, the same as at the start of the fourth quarter,
according to data compiled by Bloomberg. Yields move
inversely to prices. The Standard & Poor's 500 Index
closed yesterday at 1181.76, up 6 percent so far this


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