By Mari Murayama and Miki Anzai
Tokyo, July 12 (Bloomberg) -- The dollar, little changed, may fall on concern the currency's 9 percent gain against the euro this year will hurt the U.S. economy by making its goods too expensive to buyers from abroad.
The U.S. currency bought 85.72 U.S. cents per euro, little changed from late in New York yesterday, when it fell to its lowest level in two weeks. Against the yen, it held at 124.19.
``Concern about a strong-dollar policy is likely to linger for some time to come,'' said Shohgo Nagaya, foreign exchange manager at Nomura Trust and Banking Co. That'll probably send the currency lower, he said.
The decline was fueled by expectations a recession in Argentina that may force it to default on its bonds will damp growth in Latin America and crimp U.S. exports to the region. U.S. manufacturers have been criticizing the government's policy that calls for a strong dollar, saying it makes it tougher to sell their products.
Latin America absorbed 6.1 percent of U.S. exports last year, according to U.S. government data. Argentina accounted for 0.6 percent.
The dollar has fallen 1.2 percent against the euro since Monday, when Bank of England Governor Edward George said the strong dollar both hurts the U.S. economy by cutting demand for its goods and spurs inflation in the 12-nation euro region.
Side Effects
``The market now perceives that a dollar worth about 126 yen causes side effects -- affecting Asia last time, and Argentina this time,'' said Shingo Funatsuki, head of global foreign exchange at Citibank N.A.
When the dollar rose to 126.84 yen in April, finance ministers of the 10-member Association of Southeast Asian Nations said the weakening yen created instability in regional markets and could adversely affect prospects for economic growth.
Yet analysts said the dollar's decline may be limited as long as the U.S. government keeps policy unchanged. ``Treasury supports a strong dollar,'' a U.S. Treasury spokesman, Tony Fratto, told Bloomberg News yesterday.
``The U.S. government probably wants to keep the strong dollar policy to avoid money flowing out of the country, given U.S. dependence on overseas capital,'' said Etsuko Yamashita, an economist at Sumitomo Mitsui Banking Corp.
Investment from abroad helps keep U.S. stocks prices up and interest rates down.
The yen, which rose 1.4 percent versus the dollar this week, may have trouble pushing higher after Moody's Investors Service said the Japanese government's debt ratings face ``downward pressure.''
``Our primary concern is whether Japan can muster the necessary mix of durable reform and sustained growth,'' said Moody's Vice President Thomas J. Byrne, author of the agency's annual report on Japan.
Japan Prime Minister Junichiro Koizumi yesterday said the government may increase spending to fight a recession if the number of jobless rises.
Also limiting the yen's ascent, Japan's Finance Minister Masajuro Shiokawa said the Bank of Japan should ease monetary policy. To currency traders, that would mean adding more money to the economy, which may dilute the value of their holdings.
While analysts expect the BOJ to keep policy unchanged at its two-day meeting that ends tomorrow, pressure on BOJ is growing after Koizumi won support from U.S. President George W. Bush and other world leaders for his plan to clean up bad loans at banks and cap spending.
Koizumi's strategy runs the risk of deepening the recession and damping demand for Japanese assets before it's likely to fuel any growth, analysts said.
In other trading, the dollar rose to 1.7698 Swiss francs from 1.7674 francs in late New York. The British pound was quoted at $1.4085, up from $1.4078 yesterday.