Dollar gains for third day, helped by investment data

16 January 2004 896 words
AFX International Focus English

CHICAGO (AFX) - The dollar rallied for a third session against its European rivals Friday, on reports showing that foreign investors beefed up U.S. holdings and that U.S. consumer sentiment improved this month.

The euro was already under selling pressure against the dollar as a host of European officials make public their concerns that additional gains for the single currency could hurt prospects for economic recovery.

The comments prompted speculation authorities could cut eurozone interest rates or even intervene in currency markets to protect the competitiveness of European Union exports.

In midday New York trading, the euro was down 1.1 percent at $1.2437. It traded as low as $1.2414, its weakest level this year - and nearly 5 cents below the all-time high of $1.29 touched briefly this week.

Meanwhile, the dollar struggled but eventually prevailed with gains vs. the yen, amid suspicions that Japanese officials had intervened overnight by selling yen for dollars in order to make Japanese-made goods more attractive on global markets. By midday, the dollar was up 0.5 percent at 106.80 yen.

Money flows in

According to Treasury Department data, total net purchases as U.S. investments by foreigners were $87.6 billion in November compared to an upwardly revised $27.8 billion in October. The November results were roughly double what analysts had been expecting. "The whopping tally will help to assuage concerns about the rapid and disorderly decline in the dollar," said Miller Tabak & Co. analyst Tony Crescenzi.

The dollar tumbled vs. the world's major currencies in 2003, including a 20 percent drop against the euro, on concern that low U.S. rates will discourage foreign investment. These capital flows are viewed as necessary by some as an offset to the record U.S. trade gap, without which the dollar could come under even greater pressure.

Long-term securities purchases by foreigners were $83 billion in November vs. $41 billion a month earlier. Foreigners bought, on net, $33 billion Treasury notes and bonds, up from $12 billion in October.

On the economic front, consumer sentiment soared to a reading of 103.2 in early January from 92.6 in December, data from the University of Michigan showed.

This marked the highest level of consumer sentiment since November 2000. It's also the largest one-month jump since November 1992 and the third largest increase on record. and.

Voicing concern

Also Friday, Otmar Issing, chief economist for the European Central Bank, said he's "not indifferent to but (rather) concerned by" the single currency's sharp gains, AFX reported.

European central-bank officials and economic ministers have been airing their concerns over the weaker dollar on a daily basis over the past week. The effect of the concerted "verbal intervention" has seen the euro retreat 3 percent on the week against the dollar. The British pound fell 0.9 percent at $1.8058. The dollar rose 1.3 percent vs. its Swiss counterpart at 1.2609 francs.

Traders said market consensus was that Japanese authorities stepped into the market as dollar-yen neared the 105.74 area. Any move below 106 yen has routinely sparked intervention. Japan has spent a record amount intervening in the currency market to stem the yen's ascent, although the move has been largely fruitless as the yen traded at a three-year high against the greenback.

But the interest-rate differential between the United States and Japan continues to make a dollar-yen investment positive in what the market calls a "carry trade," said Josh Levy, president of foreign-exchange brokerage CMC Forex Group. This has helped limited the dollar's decline vs. the yen to single digits over the past year compared to double digits vs. some of the European currencies.

Speaking to reporters at the New York Stock Exchange Friday, U.S. Treasury Secretary John Snow said he wouldn't comment on the relative value of currencies. Asked his reaction to growing concerns in Europe, Snow said he still thinks a strong U.S. dollar is in the national interest, but that "open, competitive" currency markets should determine foreign-exchange levels. Following a recent trip to the United States, in which he discussed foreign exchange with the U.S. officials, Japanese trade minister Shoichi Nakagawa said he thinks that the Bush administration doesn't want a strong dollar despite U.S. government comments to the contrary. "My impression is that that is not what America really wants," Kyodo News quoted him as saying. U.S. manufacturers, which stand to benefit from a weaker dollar as they ship goods abroad, this week welcomed the dollar's drop and said it has remained orderly.

Levy looks for investors to continue to sell dollars for high-yielding currencies, including the Canadian dollar, which is benefiting from an economic recovery that's outpacing the United States. Canada is also a resource-based economy helped by the rise in oil and gold prices. But the U.S. dollar's broad Friday gains lifted the greenback against the Canadian dollar as well, with one U.S. dollar fetching C$1.2992, a gain of 0.5 percent from the previous session.

This story was supplied by CBSMarketWatch. For further information see www.cbsmarketwatch.com.

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