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Richard Benson: Inflation Disinformation

Section: Daily Dispatches

By Mark Tannenbaum and Jonas Bergman
Bloomberg News Service
Monday, December 27, 2004

The dollar declined to weaker than $1.36 per euro for the
first time, reaching its seventh record low this month, on
speculation the United States and Europe will allow the
currency to drop.

Record U.S. budget and trade deficits have deterred foreign
investors, pushing the dollar to its third straight annual
loss against the euro and yen. The U.S. currency has fallen
7.5 percent this year versus the euro and 3.8 percent against
the yen. A weaker dollar may spur U.S. exports and crimp

"There is a perception in the market that the Bush
administration is following a policy of benign neglect,"
said Paresh Upadhyaya, a currency portfolio manager who is
part of a team overseeing $29 billion at Putnam Investments
in Boston. European officials "seem comfortable at current
levels. You should buy the euro," as well as currencies
including the Canadian dollar, he said.

The dollar reached an all-time low of $1.3640 per euro, and
traded at $1.3616 at 4 p.m. in New York, from $1.3540 late
on Dec. 24, according to electronic currency-trading
system EBS. It dropped to 103.04 yen, from 103.65, and
touched the lowest since Dec. 7. The U.S. currency may
weaken to $1.40 per euro next year, Upadhyaya said.

The dollar has lost 8.7 percent this quarter against the
euro and 6.4 percent against the yen, making it the worst
performer among 16 major currencies.

Trading was about half the regular $1.9 trillion per day,
magnifying moves, said Russell LaScala, head currency
spot trader in New York at Deutsche Bank AG. Markets
were shut in the U.K., the biggest center of currency
trading, as well as in Canada and Australia. Pre-set
dollar sell orders above $1.3550 per euro deepened the
dollar's losses, LaScala said.

The currencies of Indonesia, Thailand, and India
dropped against the dollar on concern an earthquake
yesterday near the Indonesian island of Sumatra will
slow economic growth. The quake caused tsunamis
that killed more than 19,000.

"We're still biased toward a weaker dollar," said Todd
Elmer, a currency strategist in New York at Barclays
Capital Inc., a unit of Britain's third-largest bank.
"We're not yet at that pain threshold" where European
officials will ramp up efforts to curtail euro gains. That
level is closer to $1.40, he said.

European policy makers, including European Central
Bank President Jean-Claude Trichet, this month urged
the U.S. to halt the dollar's decline. Belgian Finance
Minister Didier Reynders called on the U.S. to reduce
its budget and trade gaps to reverse the dollar's slide,
L'Echo reported today.

"Without wanting to set a level for the euro, it seems
abnormal to me that the euro zone is supporting
American imbalances to this extent," Reynders told
the newspaper in an interview. "The U.S. must take

French toymaker Smoby SA this month said fiscal
2005 sales may be at the low end of its forecasts
because a stronger euro is making it less competitive
relative to Asian rivals. H.J. Heinz Co. is among U.S.
companies saying it benefited from a weaker dollar.
The world's biggest ketchup maker said the dollar's
decline boosted foreign revenue in its second quarter.

For a second straight week, futures speculators bet
the euro will fall against the dollar, according to data
from the Commodity Futures Trading Commission
covering trading through Dec. 21.

The administration of George W. Bush is the only one
that hasn't bought or sold dollars to affect currencies
since the end of the Bretton Woods system of fixed
exchange rates three decades ago. The ECB hasn't
sold euros since the 12-nation currency began trading
in January 1999. It bought euros along with the Federal
Reserve and other major central banks in September
2000. The U.S. hasn't entered currency markets since.

International investors increased their holdings of U.S.
assets in October by $48.1 billion, the smallest gain
in a year, the Treasury Department said this month.

"There are massive deficits in the U.S. and policy
makers there don't care that the dollar is slumping,"
said Jens Peter Soerensen, chief analyst in
Copenhagen at Danske Bank A/S, the No. 2 lender
in Scandinavia. The dollar will probably trade between
$1.35 per euro and $1.37 for the next year, he said.

The euro will probably rally to $1.40 next quarter, said
Greg Salvaggio, vice president of capital markets in
Washington at Tempus Consulting. Approaching that
level, "the European Central Bank will seriously
consider intervening," he said.

Bush's policy of allowing markets to set exchange
rates is unchanged, U.S. Treasury spokesman Rob
Nichols said on Dec. 23 in an e-mail response to a
question about the administration's stance, after the
dollar fell to $1.35 per euro. A day earlier, he said the
U.S. has "a strong-dollar policy," a mantra Treasury
officials have repeated for the past decade.

The U.S. needs a weaker dollar to shrink the record
deficit in its current account, said Laurence Meyer, a
former Fed governor, in an interview last week.

The shortfall in the current account, a measure of trade,
services, tourism, and some investments, widened to a
record $164.7 billion last quarter. The budget deficit was
a record $412.6 billion in the year through September,
leaving the government more dependent on foreign
purchases of Treasury debt.

"The current account is unsustainable and the dollar is
going to fall," Meyer said. "It's part of an unwinding of
global imbalances and on balance is a good development."

Canada's bond market is closed today and tomorrow.
The Canadian dollar, up 6.7 percent this year, is poised
for its third straight annual gain against the U.S. currency.
It traded at 82.06 U.S. cents.


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