Sun, May 18, 2003 page10

• Euro and yen both trounce the dollar

  LACK OF INTERVENTION After the US secretary of the treasury said a weak dollar helped US exports, analysts expected G7 ministers to take action. They were wrong

  • BLOOMBERG
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  The dollar had its biggest drop against the euro in 10 months as investors speculated that ministers at a G7 meeting this weekend won't take action to stop the dollar's 21 percent slump in the past year.

  Declines accelerated this week after US Secretary of the Treasury John Snow said the dollar's slide is helping boost US exports and that exchange rates are "best set" by the market. French Finance Minister Francis Mer said currency rates won't be part of the meeting's formal agenda.

  "The US government has shown no desire to slow down the depreciation of its currency, so people have no choice but to sell dollars," said Andrew Feltus, who helps handle US$100 billion in bonds and stocks at Pioneer Investment Management Inc in Boston.

  He holds more euro-denominated assets than dollar assets and has added French inflation-indexed bonds to his portfolios.

  The US dollar weakened to US$1.159 per euro at 5:15pm in New York, from US$1.1386 yesterday, in its largest decline since July 8.

  On Monday, it sank to a four-year low of US$1.1624. The dollar fell to ¥116.08 from ¥116.54 and touched the lowest in more than two years yesterday at ¥115.34. The euro rose to ¥134.58 from ¥132.69.

  This week, the US currency fell 0.9 percent against the euro, its sixth consecutive weekly drop, and 1.2 percent against the yen, its third weekly decline. The dollar will trade at about US$1.1560 per euro in coming days, Feltus said.

  In a May 9 interview made public this week, Snow said government buying or selling of currencies has little effect on an economy, signaling his reluctance to purchase dollars to stem declines.

  "As a general rule, we'd prefer to see interventions kept to a minimum," he said.

  Japanese Finance Minister Masajuro Shiokawa said he didn't discuss currencies at a meeting today with Snow.

  The last time the US tried to bolster the dollar was in August 1995, when the Treasury and the Federal Reserve united with the world's major central banks to buy US$300 million against the yen and US$400 million versus the deutsche mark, Europe's benchmark currency before the euro was introduced.

  "European and US government officials have given clear signs they won't do much to prevent their currencies from declining, in the case of the dollar, or strengthening, in the case of the euro," said Joseph Barnea, a trader at Bank Leumi USA, a unit of Israel's second largest bank. That is why trading "has been more favorable to the euro," he said.

  The dollar remained lower against the euro and yen after a US government report showed consumer prices fell in April by the most in 18 months as sluggish consumer demand led companies to cap prices. A separate government report showed housing starts declined last month to the slowest pace in a year.

  The US currency dropped even after a report showed a consumer confidence index compiled by the University of Michigan rose to 93.2 in May, compared with economists' expectations for 87. In April, the index registered at 86.

  "What has been pushing the dollar down is a combination of factors that include anxiety on the pace of the economic recovery in the US, rate differentials and the government's acceptance of a weaker currency," said Robert Millns, New York-based head of foreign exchange sales for HVB Group, Germany's second-biggest bank. "Today's numbers don't change that."

  Benchmark 2-year German bunds yield 86 basis points more than Treasuries with comparable maturities. Still, the yield premium has shrunk from 112 basis points at the end of last year. A basis point it 0.01 percentage point.

  Snow told reporters today that the US would increase pressure on G7 members to boost growth amid evidence that world growth has stalled.

  "The real concern on the part of the US administration is that much of the rest of the world isn't doing their share to try to stimulate growth," Robert Sinche, head of currency strategy at Citigroup Inc, said. Citigroup has the second-largest share of trading in the US$1.2 trillion-a-day currency market, behind UBS AG, according to this year's Euromoney magazine poll.

  The European central bank cut its 2.5 percent interest-rate target next month to help revive growth in the euro region. The yield on the three-month Euribor contract for June closed 2 basis points lower at 2.235 percent, down from 2.36 percent two weeks ago and a sign traders are betting on a rate cut.

  The yen has climbed about 4 percent against the dollar since mid-March. Further gains may be limited by speculation the Bank of Japan will sell more of its currency after it sold ¥2.39 trillion (US$20.5 billion) in the first quarter.

  "Expectations are that the BOJ will come into the market as the dollar continues to decline against the yen," said Robert Lynch, a currency strategist at BNP Paribas, the 13th-largest currency trader.

  The central bank, at the behest of the Ministry of Finance, acted when the currency was trading between 116.35 and 121.76 against the dollar. The biggest one-day sale of yen in the period was on Feb. 27 with ¥361.5 billion.
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