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Ted Butler: The rarest metal now may be silver

Section: Daily Dispatches

By Jonathan Fuerbringer
The New York Times
Monday, January 3, 2005

If the pessimistic pundits are right, the battered dollar
could set records this year.

With a decline of more than 6.2 percent, the dollar
would be the weakest it has been against the euro
and its dominant European predecessor, the German
mark, since the American currency began freely
trading more than 30 years ago.

A 12.8 percent fall would be the biggest one-year
decline since 1973 and would bring the dollar to
its weakest level ever against the Federal Reserve's
broad currency index of 37 nations. That index
adjusts the dollar for its value and the amount of
trade with each country.

"The credibility problem in the U.S. due to the
growing deficits and the current administration's
unwillingness to coordinate its economic policies
globally is big enough to send the dollar to new
lows over the next 12 to 24 months," said Laurie
Cameron, global currency strategist at J. P.
Morgan Private Bank.

But even if the dollar has its biggest one-year
collapse, it is not likely to break some records for
weakness. The dollar would have to plunge more
than 21.4 percent against the Japanese yen to set
a new low. And it would have to fall more than 20.1
percent against the Canadian dollar and more than
21.6 percent against the British pound to hit
post-1973 records for weakness.

Jeremy Fand, senior proprietary currency trader at
WestLB, a New York branch of a German bank,
said that the dollar could rally early in 2005 as it
becomes clear that the United States economy can
continue to grow at a respectable pace and that
interest rates here will rise, becoming more
attractive than those abroad.

"The U.S. economy is stronger than most people
thought a few months ago, and the stock market is
OK despite high oil prices," he said. "That kind of
resilience is attractive" to foreign investors.

But he said that the nation's record current-account
deficit, which has already dragged the dollar lower,
"will always be hanging over the market." So a
dollar rally early this year, he said, "doesn't mean
that at the end of 2005 we will see a stronger dollar."

The dollar finished its third consecutive year of decline
in 2004, with a 7.1 percent fall against the euro, a 4.3
percent drop against the yen and a 4 percent fall
against the broad dollar index. A fourth year of decline
in 2005 would give the currency only its second
four-year fall since 1973, based on the broad dollar
index. The other four-year slide started in 1985.

If the dollar falls to its weakest levels since the early
1970s in Europe, the euro would be worth about
$1.45, meaning that a 200-euro dinner in Paris would
cost $290. The euro was worth $1.3554 at year's end.

The dollar is unlikely to fall to its 1995 low of 80.63 yen,
analysts said. But a 12.3 percent decline to 90 yen is
possible, analysts said, if Japan does not step in again
to support the dollar and slow a rise in the yen's value.
A rise in the yen could reduce the country's exports
and, in turn, slow economic growth. Over the 15
months through March 2004, Japan spent about $310
billion to support the dollar. At 90 yen to a dollar, a
20,000-yen dinner in Tokyo would cost $222. At the
end of last year, the dollar was worth 102.63 yen.

It is not hard to find reasons for a further dollar decline.
For one thing, the United States' record current-
account deficit demands the inflow of more than $600
billion a year from abroad. Though that gap is being
covered now, Alan Greenspan, the chairman of the
Federal Reserve, has said that foreigners might curb
their appetite for American investments. If that
happens, the dollar could fall further and interest rates
here would have to rise to win foreign investors back.

Moreover, the Bush administration, although it says it
favors a strong dollar, appears willing to accept more
decline because it helps American exporters and could
help reduce the current-account deficit.

President Bush has said that markets should determine
the value of the dollar, and foreign exchange traders
take that as an invitation to a further fall.

In addition, the administration is pushing China to allow
its currency, the yuan, which is now pegged to the
dollar, to trade freely. If that happened, analysts say the
dollar would drop sharply against it and other Asian
currencies. Arun Motianey, director of investment
research at Citigroup Private Bank, estimates that the
dollar could fall more than 20 percent against over time
against a freely traded yuan.

Foreign central banks have been big buyers of United
States Treasury securities, and this buying helps
support the dollar. As of October, foreign central banks
and other official institutions owned $1.12 trillion of
Treasury securities. These purchases may slow,
however. Japan bought large amounts of Treasuries
with the dollars it got when it sold yen to slow its rise
in value against the dollar. But there has been no
intervention since March. If China loosens its
currency peg, it will also be recycling fewer dollars
into the Treasury market.

Psychology is against the dollar now. Mr. Greenspan's
comments on Nov. 19 focused attention on the
current-account problem, making it a front-burner
issue. Since his remarks, the dollar has dropped 4.4
percent against the euro, compared with a 2.8 percent
fall for the entire year before then. And speculators are
taking advantage of the negative psychology to bet on
further dollar declines. "There is a very large speculative
aspect to what is going on," Mr. Fand said.

Finally, interest rates in the United States are still
relatively low. And though they are expected to rise this
year, the dollar will not become a more attractive
investment until they actually do so.

If the dollar continues its fall this year, the main question
is whether the decline will be disruptive or therapeutic.
A rapid decline, especially one that appeared to get out
of hand, could be bad for financial markets, giving rise
to fears of a financial crisis. Both stock and bond prices
could fall if investors feared that a tumbling dollar would
force foreign investors away. Inflation would also be a
problem, as a weaker dollar would make popular
imports more expensive.

Still, an orderly decline in the dollar would be positive for
United States exporters, as well as for domestic makers
of products that compete with imports from Japan,
Europe, and elsewhere. This shift could also curb the
growth of the current-account deficit.

But Steven Englander, chief foreign exchange strategist
for the Americas at Barclays Capital, is worried that
even an orderly decline to new lows for the dollar could
upset other markets. At new lows, he said, "you will be
into territory where people are not sure how other asset
markets will react."


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