Prague, 8 January 2004 (RFE/RL) -- How low can it go?
The U.S. dollar has lost around one-third of its value against Europe's single currency over the last two years. And this week it touched a new record low -- $1.28 per euro.
The greenback hasn't been faring too well against other world currencies, either. Its slide allowed the British pound to hit an 11-year high this week, and the dollar has been losing ground against the Japanese yen, too.
Analysts point to three main factors weighing on the U.S. currency. One is low interest rates. Ben Bernanke, a member of the committee that sets policy for the U.S. central bank, the Federal Reserve, said last week that "the Fed" will likely keep interest rates low for some time. That makes U.S. assets less attractive to investors, so there's less demand for dollars.
And then there's the large U.S. trade and budget deficits. Robin Bew is chief economist at the Economist Intelligence Unit. He said: "The U.S. consumes more than it makes domestically, so it has to import a lot of goods and so it has to borrow money overseas. People are [also] becoming increasingly worried about the amount of debt that companies and the personal sector are building up in America and they're now becoming increasingly worried about the amount of borrowing the government is doing too, so everyone in America is becoming very highly indebted. That has implications for perhaps how fast America could grow in the longer term, so foreigners are becoming more and more reluctant to put money in America. So there's less demand for dollars globally and the exchange rate starts to fall."
Until those fundamental economic conditions change -- or U.S. authorities signal their concern about the dollar -- analysts say the currency is likely to fall even further.
Marc Chandler is chief currency strategist at HSBC in New York. "We think the euro is on its way to 1.35 [per U.S. dollar] by the middle of the year, and we think the dollar-yen [exchange] is going to be breaking below 100 [yen per dollar] again by the middle of the year. So the next couple of quarters, the dollar remains under pressure before stabilizing in the second half of the year ahead of the U.S. elections," Chandler said.
So far Washington seems unconcerned -- presumably because a weaker dollar gives the economy a boost by making U.S. exports cheaper. Yesterday, U.S. Treasury Secretary John Snow reiterated he supports a strong dollar. But he also said the U.S. has no plans to intervene and stop its slide. "A strong dollar is in the U.S. interest, and of course, we believe that the value of currencies, the exchange value of currencies, should be set in open competitive markets," Snow said.
Perhaps more surprisingly, there's been hardly any reaction from Europe, either. That's despite concerns by politicians and business that the euro's rapid rise could harm Europe's economy. Today, the ECB defied calls to lower interest rates -- although its president, Jean-Claude Trichet, said he does not like it when there are sharp movements in exchange rates. "As [with] all central banks, we have a stake in financial stability, in stability in general, and [we] do not particularly like excessive volatility or excessive turbulence -- that is clear," Trichet said.
Analysts say the euro's gradual appreciation has given firms time to adjust -- and global demand has been strong enough to compensate. But there have been other grumbles about the dollar's slide. The vice president of Germany's Bundesbank, Juergen Stark, said today the euro's rise could become a risk to the eurozone economy. The International Monetary Fund yesterday also warned that the dollar's fall has already "complicated" macroeconomic policy in other countries. And the Bank of Japan has been unhappy at the rise of the yen, even intervening in currency markets to weaken it.
But analysts say they don't expect any more robust response to the weaker dollar yet. Hans-Guenter Redeker notes that the stronger euro has helped keep inflation down in the eurozone. Redeker is chief foreign exchange strategist at BNP Paribas in London. "Euro inflation rates are still above a level which has been targeted by the European Central Bank, namely above 2 percent. So the question must be asked, where would euro inflation be if the euro had not been as strong as it has been? I believe that European monetary authorities will be very, very careful in making any judgments on their monetary policy concerning the interest rate level," Redeker said.
So for now, policymakers in the United States and Europe seem to be taking the weaker dollar in their stride.
Still, everything could yet change. Bew of the Economist Intelligence Unit says the key thing is not how far the dollar falls, but how fast. A sudden rapid fall, he says, would be worrying, and could prompt the U.S. authorities to act.
The U.S. dollar has lost around one-third of its value against Europe's single currency over the last two years. And this week it touched a new record low -- $1.28 per euro.
The greenback hasn't been faring too well against other world currencies, either. Its slide allowed the British pound to hit an 11-year high this week, and the dollar has been losing ground against the Japanese yen, too.
Analysts point to three main factors weighing on the U.S. currency. One is low interest rates. Ben Bernanke, a member of the committee that sets policy for the U.S. central bank, the Federal Reserve, said last week that "the Fed" will likely keep interest rates low for some time. That makes U.S. assets less attractive to investors, so there's less demand for dollars.
And then there's the large U.S. trade and budget deficits. Robin Bew is chief economist at the Economist Intelligence Unit. He said: "The U.S. consumes more than it makes domestically, so it has to import a lot of goods and so it has to borrow money overseas. People are [also] becoming increasingly worried about the amount of debt that companies and the personal sector are building up in America and they're now becoming increasingly worried about the amount of borrowing the government is doing too, so everyone in America is becoming very highly indebted. That has implications for perhaps how fast America could grow in the longer term, so foreigners are becoming more and more reluctant to put money in America. So there's less demand for dollars globally and the exchange rate starts to fall."
Until those fundamental economic conditions change -- or U.S. authorities signal their concern about the dollar -- analysts say the currency is likely to fall even further.
Marc Chandler is chief currency strategist at HSBC in New York. "We think the euro is on its way to 1.35 [per U.S. dollar] by the middle of the year, and we think the dollar-yen [exchange] is going to be breaking below 100 [yen per dollar] again by the middle of the year. So the next couple of quarters, the dollar remains under pressure before stabilizing in the second half of the year ahead of the U.S. elections," Chandler said.
So far Washington seems unconcerned -- presumably because a weaker dollar gives the economy a boost by making U.S. exports cheaper. Yesterday, U.S. Treasury Secretary John Snow reiterated he supports a strong dollar. But he also said the U.S. has no plans to intervene and stop its slide. "A strong dollar is in the U.S. interest, and of course, we believe that the value of currencies, the exchange value of currencies, should be set in open competitive markets," Snow said.
Perhaps more surprisingly, there's been hardly any reaction from Europe, either. That's despite concerns by politicians and business that the euro's rapid rise could harm Europe's economy. Today, the ECB defied calls to lower interest rates -- although its president, Jean-Claude Trichet, said he does not like it when there are sharp movements in exchange rates. "As [with] all central banks, we have a stake in financial stability, in stability in general, and [we] do not particularly like excessive volatility or excessive turbulence -- that is clear," Trichet said.
Analysts say the euro's gradual appreciation has given firms time to adjust -- and global demand has been strong enough to compensate. But there have been other grumbles about the dollar's slide. The vice president of Germany's Bundesbank, Juergen Stark, said today the euro's rise could become a risk to the eurozone economy. The International Monetary Fund yesterday also warned that the dollar's fall has already "complicated" macroeconomic policy in other countries. And the Bank of Japan has been unhappy at the rise of the yen, even intervening in currency markets to weaken it.
But analysts say they don't expect any more robust response to the weaker dollar yet. Hans-Guenter Redeker notes that the stronger euro has helped keep inflation down in the eurozone. Redeker is chief foreign exchange strategist at BNP Paribas in London. "Euro inflation rates are still above a level which has been targeted by the European Central Bank, namely above 2 percent. So the question must be asked, where would euro inflation be if the euro had not been as strong as it has been? I believe that European monetary authorities will be very, very careful in making any judgments on their monetary policy concerning the interest rate level," Redeker said.
So for now, policymakers in the United States and Europe seem to be taking the weaker dollar in their stride.
Still, everything could yet change. Bew of the Economist Intelligence Unit says the key thing is not how far the dollar falls, but how fast. A sudden rapid fall, he says, would be worrying, and could prompt the U.S. authorities to act.
