9 February 2005, 13:09  Dollar Loses Steam

The dollar paused for breath on Wednesday after hitting three-month highs versus the euro this week as commentators questioned the Federal Reserve chief's recent optimism about the U.S. twin deficits ahead of key trade data.
This week's dollar rally was powered in part by comments from Fed chairman Alan Greenspan who said market forces may stabilize and cut the record current account deficit. This eased persistent worries about structural problems in the economy.
But noted Fed watcher John Berry said in a Bloomberg column that currency markets had been "perhaps misled" by Greenspan's comments and that the chairman listed many reasons for which the deficit was not likely to shrink soon.
"There is a reassessment in the optimism we heard from Greenspan last week," said Chris Gothard, currency analyst at Brown Brothers Harriman in London.
"People heard the words 'market pressures may narrow' but they didn't hear the reams and reams about how dangerous the situation is. People are having a rethink about the optimism on the deficits."
At 3:40 a.m. EST the dollar was steady on the day at $1.2779, compared with a three-month high set on Monday and retested on Tuesday at $1.2729.
The dollar was also 0.11 percent weaker at 105.64 yen, compared with Tuesday's two-month high of 105.95, and slightly softer versus the British pound.
Investors were keenly waiting for international trade data from the UK, due at 4:30 a.m. EST and expected to show another record deficit.
But trading volumes were seen thinned down by the Chinese New Year celebrations in Asia.
THE ORDER OF GREENSPAN
Berry cited no Fed sources for his interpretation of Greenspan's speech, but traders seized on the comments to sell the dollar after it had rallied sharply.
The U.S. current account deficit has been at the center of market's concerns that the U.S. economy could suffer under the weight of its trade and budget deficits.
These worries had brought the dollar to record lows against the euro in December but rising optimism about economic strength and future interest rate hikes in the U.S. helped the dollar regain some nine cents so far in 2005.
Some analysts said the dollar was at risk of falling again this week if Thursday's trade data showed another swelling of the deficit instead of the expected contraction.
A poll showed a median forecast for the deficit to shrink to $57 billion in December from $60.3 billion the previous month.
"This is a risk because it takes to task Greenspan's assertion that the current account deficit might be turning around," said Naomi Fink, a senior currency analyst at BNP Paribas.
Greenspan's comments came just before President Bush submitted a proposal to Congress on Monday that forecast a narrowing in the budget deficit to 1.7 percent of gross domestic product by fiscal 2008 from 3.5 percent in the current year.
But with even members of Bush's own Republican Party questioning the permanence of proposed spending cuts, some analysts doubt if a reduced deficit will materialize.
"Looking at the budget itself, I am skeptical of whether the Bush administration is going to be able to halve the deficit in five years time," said Fink.

© 1999-2024 Forex EuroClub
All rights reserved