If a Currency Can Feel, the Dollar Feels Vulnerable - feb - 24, 2005
Dear Crowne Gold Clients,
By Jonathan Fuerbringer
The New York Times
Thursday, February 24, 2005
The dollar's plunge Tuesday and its small rebound yesterday
underscored how vulnerable it is right now to a further decline.
The vulnerability can be traced to a fear that the United States
will not be able to attract the funds from abroad needed to cover
its current-account deficit, which is expected to set a record for
2004 of more than $600 billion.
The dollar rallied modestly yesterday after several Asian central banks said that they were not selling dollars or intending to sell dollars to diversify their reserves into other currencies.
The dollar's small rebound came after it plunged 1.5 percent against
the euro and 1.4 percent against the yen Tuesday, after reports,
later denied, that the central bank of Korea was planning to
diversify some of its reserve holdings out of dollars and into other currencies. The dollar sell-off also sent stock and bond prices
lower on Tuesday and helped push interest rates higher.
Yesterday, stocks rebounded modestly and interest rates slipped
slightly, as the dollar rose 0.2 percent against the euro and 0.7
percent against the Japanese yen. The euro was valued at $1.3226,
down from $1.3257 Tuesday, and the dollar was worth 104.85 yen, up
from 104.09 Tuesday.
Central banks are major contributors to the flow of funds from
abroad to cover the current-account deficit, which is the gap in
trade and services with the rest of the world. A slowing of that
flow could send the dollar lower, analysts say. In 2004, purchases
of United States stocks and bonds by official government agencies,
which is mostly done by central banks, totaled $236 billion, or a
quarter of the total inflows.
But some analysts said that it was not in the interest of central
banks, especially those in Asia, to sell dollars now -- sudden
selling could cause the dollar to plunge, disrupting world financial
In addition, Asian central banks want to keep their currencies from
rising further against the dollar so that their countries'currencies and exports can continue to be competitive with China's
currency and exports and in markets around the world. China's
currency, the yuan, is pegged to the dollar, which means the Chinese
must sell yuan to buy dollars, which simply increases their dollar
"I don't think they will be out there leading the charge in selling
the dollar," Steven Englander, chief foreign exchange strategist for
the Americas at Barclays Capital, said of the central banks.
On Tuesday, analysts immediately dismissed the idea that the Korean
plan would lead to significant dollar selling by that or other
central banks. But the dollar still plunged.
"The market has its heart on selling the dollar," said Robert
Sinche, global head of currency strategy at Bank of America, "and
found in what was really a quiet market a reason to sell dollars."
Yesterday's rally was not enough to make up Tuesday's losses,
although the central bank of Korea denied any plan to diversify its
dollar holdings into other currencies.
In addition, the director of the foreign exchange markets division
of Japan's ministry of finance said that Japan had no plans to shift
its foreign currency reserves from dollars to other currencies,
according to Bloomberg News. The central bank of Taiwan said in a
statement that it was not selling dollars.
In its statement, the Bank of Korea said, "Recent reports by the
foreign media that the BOK is selling U.S. dollars are not true,"
according to Bloomberg News. The statement said that the bank, in a
report for the National Assembly, was planning to "diversify
Analysts said Tuesday that it appeared that the plan was to set up a money-managing entity that would be responsible for investing a
portion of the reserves held by the Bank of Korea. One goal would be
to increase the return on the reserves by investing in fixed-income securities with lower credit quality and higher yields.
One reason that the dollar can fall sharply on news like Korea's
announcement, even when analysts said immediately that it had been
misinterpreted, is that currency traders and speculators thrive on
market volatility. In addition, many traders have sell or buy orders
already set up at certain dollar levels to protect their profits or
reduce their losses. When these levels are passed, a dollar move can accelerate, as it did on Tuesday.
"The market sentiment is very pro-price action these days," Mr.
Englander of Barclays Capital said.”
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