News and Information
Dollar continues record declines
|November 18, 2004
| The dollar has continued its record-breaking slide against many of the world's major currencies, with analysts predicting it could fall further.
Comments by the US administration that it favours a strong dollar failed to stem losses as analysts say little is being done to match words with actions.
They point out that a weaker dollar can help drive export demand, as well as narrow the current account deficit.
Also, higher Asian interest rates are likely to lure investors from the US.
Heading on down
The dollar fell to a record low of $1.3074 against the euro in London trading before bouncing back to $1.2989.
It also slid against the yen and hit a seven-year low against the South Korean won.
"The US dollar will remain under pressure," Merrill Lynch said in a note to investors, citing China's attempts to rein in its booming economy as a main contributing factor.
The market's selling the dollar now on worries over the U.S. deficit, it's hard think it will stop soon
Junya Tanase, a strategist at JPMorgan Chase
Many analysts are predicting that borrowing costs will have to increase if China's economy is to avoid overheating.
Should interest rates rise, it will increase capital inflows into the country, having a positive knock-on effect for other currencies in Asia and countries such as Australia and New Zealand, Merrill Lynch said.
"China's economy is slowing, but it has not slowed enough," the investment firm said, adding that last month's interest rate hike "is not enough, it is merely the first of many such measures to come".
There also seems to be less risk of intervention in the market by countries such as Japan because the region's currencies have been strengthening together - meaning they are still as competitive as each other, analysts said.
South Korea's Finance Minister Lee Hun-jai said the government would allow the market to set the won's level and that it did not have a target value to defend.
Should traders try to shift the market, however, then its stance will change, he said.
"The government hopes everything goes on appropriately based on supply and demand in the market," said Mr Lee.
"But government won't leave it unchecked when the foreign exchange market shows rapid fluctuations due to speculative forces."
At the heart of the dollar's problems, however, are imbalances in the US economy that analysts are less and less willing to ignore.
The budget deficit and current account deficit have ballooned to record levels
On Wednesday, US Treasury Secretary John Snow told the Royal Institute of International Affairs in London that US policy "is for a strong dollar".
But his pledges to curb the US budget deficit did little to reassure an already sceptical market.
"Because the market's selling the dollar now on worries over the US deficit, it's hard think it will stop soon," said Junya Tanase, a strategist at JPMorgan Chase. "It's a deep-rooted problem."
| Support Caprivi Freedom
Fill out the form below to become a member of this site and receive our regular newsletter.