Sat, Mar 19, 2005 page12

• US dollar heads for weekly gain

  SECURITY The greenback strengthened against the yen and euro this week as investors shunned emerging markets in favor of the attraction of US Treasuries

  • BLOOMBERG
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  The US dollar headed for its first weekly advance against the yen in five and rose versus the euro as declines in emerging-market stocks and bonds prompted some investors to seek the safety of US Treasuries.

  Stock markets in countries including Egypt, Poland and Peru fell after the US 10-year yield climbed to a seven-month high this week. The Federal Reserve next week will probably lift interest rates for a seventh time since June, boosting the return on dollar-based deposits.

  "When you get emerging markets under pressure, money tends to flow back into dollars," said Ian Gunner, head of currency research in London at Mellon Financial Corp, which oversees about US$700 billion in assets. "There is always some residual support for the currency."

  The dollar rose to ?104.78 as of midafternoon in Tokyo.

  It was at US$1.3356 per euro, from US$1.3378. The US currency is up 0.8 percent against the yen and 0.7 percent versus the euro on the week.

  Emerging-market stocks fell yesterday, with Egypt's CASE 30 Index leading declines, sinking 6.3 percent. The CECE Traded Index of 25 companies in Poland, Hungary and the Czech Republic slid 1.5 percent to 1,624.62, erasing six weeks of gains. The index has slipped 13 percent in six days, the longest streak of declines since the same period ending Oct. 27, 2003.

  "Emerging markets have been whacked, and when people want to hunker down they still go to the US and the dollar," said David Mozina, Sydney-based currency strategist at ABN Amro Holding NV. "The Fed's in the process of jacking up rates, and that should support the dollar."

  The US currency may rise beyond US$1.33 per euro and ?105 in the next few days, Mozina said.

  The margin by which the yield on US two-year debt exceeded similar maturity German bonds reached a four-year high of 131 basis points, or 1.31 percentage points, on March 15, before narrowing to 116 basis points.

  The yield on the US benchmark 10-year note on March 14 traded at a seven-month high of 4.58 percent, increasing the attraction of US Treasuries. It has since fallen 11 basis points, or 0.11 percentage point, to 4.47 percent.

  The Fed, which raised interest rates in quarter percentage- point increments six times since June, will do so again on March 22, according to the median estimate of 92 economists surveyed by Bloomberg News.

  The Fed's benchmark rate target will reach 3.75 percent by Dec. 31, according to the median forecast of 66 economists polled by Bloomberg from March 1 to March 8.

  The European Central Bank's comparable rate is 2 percent, while the Bank of Japan has kept borrowing costs near zero since March 2001.

  "Rising US interest rates are finally coming to support the US dollar by enticing money back into the US," said Kenichiro Ikezawa, who manages US$1 billion in overseas debt at Daiwa SB Investments in Tokyo. "That's a classic phenomenon we normally see as the Fed raises interest rates, but had not been seen so much in this tightening cycle. It's dollar-positive."

  The dollar may gain to US$1.325 per euro and ?105.50 next week, Ikezawa said.

  Gains in the US currency may be limited over concerns the US will still fail to attract sufficient capital to offset its current account deficit. The shortfall in the current account was a record US$187.9 billion in the fourth quarter, the Commerce Department said two days ago. The news sent the dollar down more than US$0.01 on March 16, the only day this week it declined.

  "The current account deficit is offsetting news about US growth and rising rates," said Callum Henderson, head of global currency strategy in Singapore at Standard Chartered Plc.

  The US needs to attract more than US$2 billion a day in investments from abroad to compensate for the deficit and hold the dollar's value, according to Bloomberg calculations.

  The yen also fell as oil traded near a record high, raising speculation it may stall economic growth in Japan, which imports almost all of its petroleum.

  Japanese Finance Minister Sadakazu Tanigaki said the government "must closely watch oil prices because they affect the cost of various materials."
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