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Bob Bishop has antidote to gold gloom, and Chip Hanlon examines the ETF

Section: Daily Dispatches

By Richard Blackden and Joshua Krongold
Bloomberg News Service
Wednesday, December 15, 2004

The dollar fell the most in almost a month against the
yen and dropped versus the euro on a report showing
purchases of securities in the U.S. increased in
October at the slowest pace in a year.

Investors bought a net $48.1 billion, down from $67.5
billion in September, the Treasury Department said in
its monthly report on transactions of Treasury notes,
corporate bonds, stocks, and other financial assets.
U.S. investors accumulated more shares of foreign
companies, and corporate bond purchases fell.

"People were expecting it to be worse than last
month, but nobody was expecting it to be below 50,"
said Simon Derrick, head of currency strategy in
London at Bank of New York. "We will continue to
see the dollar slide in the last part of this month."

The dollar slid to 104.24 yen at 3:31 p.m. in New
York from 105.54 late yesterday, according to
electronic foreign-exchange trading system EBS.
It is the biggest drop since Nov. 17. Versus the
euro, the dollar declined to $1.3408 from $1.3298.
The yen's advance began in Asian trading after a
Bank of Japan report showed companies increased
forecasts for earnings and spending.

Derrick expects the dollar to fall to $1.40 per euro
in three months and to $1.45 in 12 months. This
year the U.S. currency is down 6.1 percent against
the euro and 2.8 percent compared with the yen.

The dollar has declined since Federal Reserve
Chairman Alan Greenspan told the European
Banking Congress in Frankfurt on Nov. 19 that
foreign investors may tire of financing a record
shortfall in the U.S. current account, the broadest
gauge of trade. The trade deficit widened more
than expected in October to a record $55.5 billion,
the Commerce Department said yesterday.

"The bottom line is that coming on the heels of a
record trade deficit yesterday, this clearly falls
short of what the U.S. needs to finance the deficit,"
said Richard Franulovich, a New-York based
currency strategist at Westpac Banking Corp.

A report tomorrow may show the current-account
shortfall grew to $170.6 billion last quarter, based
on the median forecast of economists surveyed by
Bloomberg. To compensate for the gap and
maintain the value of the dollar, the U.S. needs to
attract about $1.8 billion a day, or about $55 billion
a month, based on Bloomberg calculations. The
current account is a measure of trade, services,
tourism, and investments.

President George W. Bush said U.S. policy is to
promote a strong dollar, and he renewed his pledge
to work with Congress next year to cut the federal
budget deficit by half in four years.

"The policy of my government is a strong dollar
policy," Bush said. "We believe the markets should
make the decision about the relationship between
the dollar and the euro."

His comments came in response to a reporter's
question after he met at the White House with Italian
Prime Minister Silvio Berlusconi. Bush said
Berlusconi "expressed his concerns about the
relationship" between the dollar and the euro. A
weaker dollar against the euro makes European
exports more expensive in the U.S.

The president also said the Fed's interest-rate
increase yesterday means that Greenspan "is
also aware of the relative currency valuations"
between the dollar and euro.

"Bush is doing a favor for Berlusconi," said Greg
Anderson, senior currency strategist at ABN
Amro Holding NV in Chicago. "He asked him to
talk about the dollar, and he has. Does it mean
he wants the dollar to rally? No."

U.S. Treasury Secretary John Snow said in an
interview on CNBC that "our policy has been
articulated over and over by me. There's been no
change in that policy. The president today was
focusing on the fundamentals that underlie the
policy -- deficit reduction, short-term, long-term,
and obviously good monetary policy help create
the foundation for a strong economy.'

Foreign investors bought a net $18.3 billion of
U.S. corporate debt in October, down from
$42.7 billion the previous month. At the same
time, U.S. investors bought a net $12 billion of
foreign equities in October, after selling $1.3
billion in the previous month.

"U.S. investors went on a buying spree of foreign
stocks," Franulovich said. "Clearly, U.S. investors
are of the opinion that dollar weakness is
entrenched and the best way to play that is
buying foreign equities."

The dollar also weakened after the Fed yesterday
said it will keep to a plan to increase interest rates
at a "measured pace." Policy makers lifted the
target rate by a quarter point to 2.25 percent.

"People had been hoping for a bit more support
from the Fed, and that's now disappeared," said
Carsten Fritsch, a foreign-exchange strategist in
Frankfurt at Commerzbank AG. "There's now a
refocusing on the weaknesses of the dollar."

The BOJ's quarterly Tankan index also showed
that optimists among manufacturing executives
outnumbered pessimists for a sixth quarter,
dispelling some speculation that the pace of
growth in the world's second-largest economy
will slow further.

"Details of this report were better than people
had expected," said Adam Cole, a currency
strategist in London at RBC Capital Markets.
"There had been rumors that the report would
be very poor, so it's a sigh of relief."

The Tankan report follows government figures
last week showing Japanese gross domestic
product barely grew in the third quarter and
machinery orders unexpectedly dropped.


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