Dollar Falls Sharply Against Euro and Pound (NYTimes, 11/25/06)
November 25, 2006
Dollar Falls Sharply Against Euro and Pound
By JEREMY W. PETERS and CARTER DOUGHERTY
Correction Appended
The dollar dropped sharply yesterday against a range of major currencies, with the euro breaking through $1.30 for the first time in a year and a half. The fall highlighted concerns about softness in the American economy as economies abroad continue to expand.
The currency sell-off came as investors weighed a number of issues that complicate the prospects of the United States in the coming months, including a huge trade imbalance with China and a slowing domestic housing market. On top of that, economic growth in some European countries is gaining momentum, threatening to siphon investment away from the dollar.
The dollar’s losses came in a thin trading day in which the British pound rose to its strongest value against the dollar in two years. The euro traded at $1.3079 yesterday afternoon, up from $1.2941 on Thursday. The pound was trading at $1.9317, up from $1.9156.
Stocks closed lower on Wall Street yesterday after a shortened holiday trading session that was soured by news of the dollar’s woes.
“To dismiss this as a technical correction is to overlook the structural reasons why the U.S. dollar is having a very hard time these days,” said Hans Redeker, global head of currency strategy at BNP Paribas in London.
Economists say the United States is in a vulnerable position compared with its global competitors. While the most recent data show that the trade imbalance tightened in September, the decline was largely a result of falling oil prices. The deficit between what Americans import and export was a negative $586.2 billion for the first nine months of the year, and it remains on track to break last year’s record of a negative $716.7 billion. The biggest chunk by far represents imports from China.
The trade gap will be one of the major issues that Treasury Secretary Henry M. Paulson Jr. and other top Bush administration officials discuss next month when they travel to China. Mr. Paulson, along with a delegation that will include Ben S. Bernanke, the Federal Reserve chairman, is expected to press Chinese officials on a number of economic issues, from cracking down on piracy to allowing the Chinese yuan to trade more freely in currency markets.
Analysts said that the dollar’s drop yesterday, which was accelerated by orders from traders to sell automatically once it fell past $1.30 against the euro, reflected a growing anxiety over Chinese economic policy. China’s central bank holds a large amount of American currency, and speculation has intensified recently that it could begin selling off dollars to avoid being burned if the dollar collapses.
Also lurking behind the dollar’s depreciation is the rising probability, in the view of some economists and currency investors, that a slowing American economy will force the Federal Reserve to begin cutting borrowing costs next year.
Against the backdrop of a European Central Bank that seems determined to tighten rates further next year, the appeal of dollar-denominated assets is falling as the prospect of higher returns in Europe rises.
“There can be no doubt that the E.C.B. has more shots in its gun,” said Erik Nielsen, chief Europe economist at Goldman Sachs in London. “If the Fed starts cutting next year, then the gap begins to widen.”
Already, the European Central Bank has signaled that it will raise rates by a quarter percentage point, to 3.5 percent, on Dec. 7, and bank watchers have been voicing rising expectations of more rate increases after that.
This week, data on German business confidence, French economic growth in the third quarter and a historically reliable gauge of business sentiment in Belgium all pointed toward stronger growth. All these factors are more likely than not to push the European bank to raise interest rates in a bid to head off inflation, a course of action that would damp the appeal of the dollar in relation to the euro, currency specialists said.
“This drop in the dollar has been justified for some time,” said Chris Turner, head of foreign exchange strategy at ING Baring in London. “The American economy could do more than simply land softly, and Europe is pretty strong right now.”
But there was no single event yesterday to touch off such a sharp drop in the value of the dollar. Rather, economists said, it was a culmination of recent signs of weakness in the American economy that investors found troubling. Some experts said that could suggest that the dollar’s losses would deepen.
Julian Jessop, chief international economist for Capital Economics in London, said in a research note yesterday that the sudden drop in the dollar was “an indication of a much more fundamental lack of support for the currency.” He said this suggests that “the falls will be all the larger once the markets do start to anticipate persistently sluggish growth.”
Jeremy M. Peters reported from New York and Carter Dougherty from Frankfurt.
Correction: Nov. 28, 2006
A front-page Inside summary on Saturday about the sharp drop in the dollar misstated China’s trade relationship with the United States, which was a factor in the currency’s decline. The United States runs a trade deficit with China, not a surplus.
Dollar Falls Sharply Against Euro and Pound
By JEREMY W. PETERS and CARTER DOUGHERTY
Correction Appended
The dollar dropped sharply yesterday against a range of major currencies, with the euro breaking through $1.30 for the first time in a year and a half. The fall highlighted concerns about softness in the American economy as economies abroad continue to expand.
The currency sell-off came as investors weighed a number of issues that complicate the prospects of the United States in the coming months, including a huge trade imbalance with China and a slowing domestic housing market. On top of that, economic growth in some European countries is gaining momentum, threatening to siphon investment away from the dollar.
The dollar’s losses came in a thin trading day in which the British pound rose to its strongest value against the dollar in two years. The euro traded at $1.3079 yesterday afternoon, up from $1.2941 on Thursday. The pound was trading at $1.9317, up from $1.9156.
Stocks closed lower on Wall Street yesterday after a shortened holiday trading session that was soured by news of the dollar’s woes.
“To dismiss this as a technical correction is to overlook the structural reasons why the U.S. dollar is having a very hard time these days,” said Hans Redeker, global head of currency strategy at BNP Paribas in London.
Economists say the United States is in a vulnerable position compared with its global competitors. While the most recent data show that the trade imbalance tightened in September, the decline was largely a result of falling oil prices. The deficit between what Americans import and export was a negative $586.2 billion for the first nine months of the year, and it remains on track to break last year’s record of a negative $716.7 billion. The biggest chunk by far represents imports from China.
The trade gap will be one of the major issues that Treasury Secretary Henry M. Paulson Jr. and other top Bush administration officials discuss next month when they travel to China. Mr. Paulson, along with a delegation that will include Ben S. Bernanke, the Federal Reserve chairman, is expected to press Chinese officials on a number of economic issues, from cracking down on piracy to allowing the Chinese yuan to trade more freely in currency markets.
Analysts said that the dollar’s drop yesterday, which was accelerated by orders from traders to sell automatically once it fell past $1.30 against the euro, reflected a growing anxiety over Chinese economic policy. China’s central bank holds a large amount of American currency, and speculation has intensified recently that it could begin selling off dollars to avoid being burned if the dollar collapses.
Also lurking behind the dollar’s depreciation is the rising probability, in the view of some economists and currency investors, that a slowing American economy will force the Federal Reserve to begin cutting borrowing costs next year.
Against the backdrop of a European Central Bank that seems determined to tighten rates further next year, the appeal of dollar-denominated assets is falling as the prospect of higher returns in Europe rises.
“There can be no doubt that the E.C.B. has more shots in its gun,” said Erik Nielsen, chief Europe economist at Goldman Sachs in London. “If the Fed starts cutting next year, then the gap begins to widen.”
Already, the European Central Bank has signaled that it will raise rates by a quarter percentage point, to 3.5 percent, on Dec. 7, and bank watchers have been voicing rising expectations of more rate increases after that.
This week, data on German business confidence, French economic growth in the third quarter and a historically reliable gauge of business sentiment in Belgium all pointed toward stronger growth. All these factors are more likely than not to push the European bank to raise interest rates in a bid to head off inflation, a course of action that would damp the appeal of the dollar in relation to the euro, currency specialists said.
“This drop in the dollar has been justified for some time,” said Chris Turner, head of foreign exchange strategy at ING Baring in London. “The American economy could do more than simply land softly, and Europe is pretty strong right now.”
But there was no single event yesterday to touch off such a sharp drop in the value of the dollar. Rather, economists said, it was a culmination of recent signs of weakness in the American economy that investors found troubling. Some experts said that could suggest that the dollar’s losses would deepen.
Julian Jessop, chief international economist for Capital Economics in London, said in a research note yesterday that the sudden drop in the dollar was “an indication of a much more fundamental lack of support for the currency.” He said this suggests that “the falls will be all the larger once the markets do start to anticipate persistently sluggish growth.”
Jeremy M. Peters reported from New York and Carter Dougherty from Frankfurt.
Correction: Nov. 28, 2006
A front-page Inside summary on Saturday about the sharp drop in the dollar misstated China’s trade relationship with the United States, which was a factor in the currency’s decline. The United States runs a trade deficit with China, not a surplus.
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