Readjust Your Portfolios - Europe & Asia Losing Confidence in U.S. Economy & Dollar

Discussion in 'Trading' started by ByLoSellHi, Nov 24, 2006.

  1. Dollar Falls as Concerns Grow About Economy

    Published: November 24, 2006

    The dollar dropped sharply against a broad range of major currencies today, and the euro broke through the $1.30 mark for the first time in a year and a half, highlighting concern about the strength of the American economy.

    The dollar’s losses came during a thin trading day in which the British pound rose to its strongest value against the dollar in two years. The Japanese yen and the Swiss franc also gained at the dollar’s expense.

    Stocks closed lower on Wall Street today after a shortened trading session that was soured by news of the dollar’s woes.

    Though the Thanksgiving holiday probably accentuated the dollar’s fall, analysts said the drop appears to reflect concerns that the American economy will continue to weaken as economies in Europe and Asia grow stronger.

    “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.

    A number of factors, including slower growth and the multibillion-dollar trade deficit, put the American economy in a vulnerable position compared with its global competitors. While the most recent data show that the trade gap tightened in September, the decline was largely due to falling oil prices. The trade deficit was $586.2 billion for the first nine months of the year, and it remains on track to break last year’s record of $716.7 billion. The biggest chunk by far represents imports from China.

    The trade imbalance 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 today 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 weakening 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 ECB 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.”