November 26, 2004
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Posted on Fri, Nov. 26, 2004
The dollar's woes worsen
BANKERS GLOOMY; GOLD AT 16-YEAR HIGH
Mercury News Wire Services
The outlook for the embattled U.S. dollar worsened Thursday as the currency slid further against the euro and yen and bankers predicted it won't recover anytime soon.
Gold, meanwhile, rose above $450 an ounce for the first time in more than 16 years, driven by investors looking for an alternative to the American currency.
The dollar fell to a record low $1.3242 euros from $1.3186 late Wednesday and was quoted at 102.56 Japanese yen, down from 102.81. At one point it fell to 102.40, the weakest in more than four years. The current downturn has taken the euro from $1.20 about two months ago. It rose above $1.31 for the first time Tuesday.
On Thursday, bankers at UBS AG, JPMorgan Chase, Merrill Lynch and Deutsche Bank predicted the huge deficit in the U.S. current account, the broadest measure of trade, will undermine the dollar. Also hurting the currency, bankers said, are expectations that policy makers will fail to halt the decline.
A weekend meeting of the finance officials from the Group of 20 industrial and developing countries delivered no signal of concerted action to stem the tide.
``We are increasingly dependent upon an inflow of foreign capital,'' said Paul Volcker, a former chairman of the Federal Reserve, in an interview with PBS television late Wednesday. ``The problem is how long can this go on,'' he said. ``When something happens it tends to go further than you imagined, and that's the history of financial crises.''
``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 London. JPMorgan cut its estimates to 96 yen and $1.37 per euro from 100 and $1.30.
Others are predicting the euro could hit $1.40 by the middle of next year. European Central Bank President Jean-Claude Trichet recently called the rapid increase ``brutal.''
Still, the ECB has yet to intervene in currency markets in an effort to halt the dollar's fall. Lee Ferridge, chief currency strategist at Rabobank in London, said with the United States unlikely to join in such a move, he didn't expect the ECB to do so.
``I don't think the ECB would go it alone,'' he said.
The dollar's decline against the yen may be stemmed by concern Japan will resume sales of its currency after an eight-month hiatus, said Kikuko Takeda, a manager of foreign exchange at Bank of Tokyo Mitsubishi in Tokyo.
But for now, ``The dollar-bearish sentiment, not only against the euro but also other currencies, remains firmly in place,'' said Minoru Shioiri, senior manager of foreign exchange at Mitsubishi Securities in Tokyo.
Kamal Naqvi, a precious metals analyst with Barclays Capital, said investors might push gold prices toward $455 or $460. Other analysts suggested it could go a lot higher if the dollar weakens further.
``Gold bulls should be dancing in the street,'' Barclays Capital said in an investment note. Gold, which is priced in dollars, has risen about 13 percent in the past two months.
November 24, 2004
EDITORIAL
Inflation and Interest Rates
f the Federal Reserve Board were free to manipulate interest rates solely in response to business conditions, it would make sense to stand pat in December, and avoid a rate hike despite recent signs of inflation. Unfortunately, Alan Greenspan, the chairman, doesn't have that kind of flexibility these days. Raising interest rates looks like the more prudent route - even though stagnating wages could really use a little help right now.
A probable December rate increase is noteworthy in and of itself, but even more so for how it highlights the growing divergence in monetary and fiscal policy. By continuing to raise rates, Mr. Greenspan would be easing off the economic accelerator of rock-bottom rates.
President Bush, meanwhile, plans to go full speed ahead with more tax cuts. For the Fed and the administration to be at cross-purposes does not bode well for the economy.
The unexpectedly large 0.6 percent inflation spike in October was driven mainly by increases in the costs of oil and food - which have since abated. The spike was not in any way related to wage gains. In fact, wage gains have not outpaced inflation in eight of the last 12 months. Economists generally regard the price of labor as far more important than the cost of commodities when it comes to inflation. So all things being equal, Mr. Greenspan might choose to hold rates steady to spur hiring.
Alas, all other things are not equal. As much as the job market might benefit from a pause in rate hikes, Mr. Greenspan is unlikely to take a break. For one, rates are already very low - a holdover from the Fed's effort to stimulate economic growth in the last few years. Mr. Greenspan needs more room to maneuver in the event of a body blow to the economy - an oil shock, say, or terrorist attack. The chairman has to get rates up, in case he needs to bring them down.
That is particularly true since the Fed cannot count on other stimuli being available. Mr. Bush's fiscal policies - tax cuts, chief among them - have already busted the federal budget, and the outlook is for more deficit-financed giveaways. Nor can Mr. Greenspan fall back on a strong dollar. The weakening dollar, a result of global imbalances that are also traceable, in part, to the budget deficit, increases the pressure for higher rates because it is, in itself, an inflationary force that is gathering steam. Speaking at an international banking conference in Germany last week, Mr. Greenspan said that foreign investors who are financing America's huge deficits would eventually resist lending more to the United States. That, in turn, would cause the dollar to fall even further than its recent historic lows, risking an upsurge in American prices and interest rates.
Given the policy bind, the Fed would be justified if it raised rates next month. That doesn't make a rate hike an unambiguously good policy. The Fed is being reduced to making the best of a bad situation.
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