The dollar dropped to a 12-year low against the yen and record lows versus the euro and Swiss franc on Thursday, sliding on doubts about the effectiveness of the Federal Reserve’s efforts to aid strained credit markets and limit the damage to the US economy.
The dollar slid over 1% on the day to lows near ¥100.20 the lowest since late 1995. It also slumped to an all-time low against the euro of $1.5587 and a record low of 1.0108 Swiss francs. The slide came despite remarks from US President George W. Bush on Wednesday that he would like to see a stronger dollar and expressed concern its falling value was one cause of soaring US energy prices. The dollar could continue to fall unless authorities acted further to ease concerns about the US housing sector and ailing credit markets, said Tomoko Fujii, head of economics and strategy for Japan at Bank of America. “There is no reason to buy the dollar,” Fujii said. “It is not as if the US government is going to step in and buy up every mortgage,” she added.
With the dollar having broken below the 1999 low of ¥101.25, currency strategists at Morgan Stanley said in a research note, that it makes sense to expect further declines and to sell the dollar, aiming for a target of ¥95. The dollar’s slide against the yen has fuelled speculation about the chances of yen-selling intervention by Japanese authorities, who have a history of restraining the yen’s strength to maintain the competitiveness of exporters. But this time, many market participants do not expect Japan to intervene in the market even if the dollar falls below the psychologically important 100 level for the first time in more than 12 years.
Japan is seen unlikely to intervene at a time when members of the Group of Seven have been calling on China to allow greater exchange rate flexibility, and also because the yen has not risen too much against currencies other than the dollar such as the euro. Japanese Economics Minister Hiroko Ota said, that a rise in the yen and higher oil prices were beginning to hurt Japanese corporate profits. Finance Minister Fukushiro Nukaga, whose ministry is in charge of foreign exchange intervention, told Reuters he would not comment on whether Japanese authorities would consider intervening in the currency market to halt the yen’s rise against the dollar.
HEDGE FUND WOES
The dollar had rallied on Tuesday after the Federal Reverse said it would lend primary dealers $200 billion in Treasury securities and accept a wider array of mortgage debt as collateral to ease tight credit conditions. But those gains were quickly wiped out as investors wondered whether the Fed’s plan would be sufficient to revive credit markets and boost a struggling US economy. Despite the Fed’s measures, investors remained worried about possible financial troubles at hedge funds, traders said. Underscoring such concerns, Drake Management, which manages nearly $5 billion in hedge fund assets, told investors on Wednesday it is considering liquidating all three of its hedge funds, citing “challenging market conditions.”
The euro gained a boost on Wednesday when data showed euro-zone industrial output rose much more than expected in January, suggesting the European Central Bank need not rush to lower interest rates. That contrasts with the US market, where investors now see a roughly 80% chance of the Federal Reserve lowering interest rates by 75 basis points from 3.0% at a policy meeting next Tuesday, and around a 20% chance of a 50 basis-point reduction. (Reuters)