US dollar on shaky ground
Associated Press, 24 January 2003
The dollar remained on the ropes on Thursday, buffeted by some hawkish remarks from the US administration about the standoff with Iraq.
It was also stung by a pointed signal from Russia's central bank that the appeal of dollar-denominated assets is waning.
Oleg Vyugin, first deputy chairman at the Russian central bank, said the bank plans to cut the share of US dollars in its foreign exchange reserves and increase the share of other currencies.
The dollar currently makes up more than half of the Russian central bank's $US47.9 billion ($A81.26 billion) in gold and foreign exchange reserves.
The single European currency broke fresh 39 month highs against the greenback, while hitting a three-and-a-half-year high of 127.37 yen versus its Japanese counterpart.
The British pound jumped to its highest level against the dollar since January 2000, breaking through the $1.62 barrier on much better-than-expected UK retail sales for December.
News late on Wednesday that North and South Korea agreed to a peaceful resolution of their nuclear dispute didn't give the dollar an immediate lift.
But once currency markets digest the political impact of this development, "the first knee-jerk reaction should be a slight dollar positive across the board, as one of the geopolitical worries that has been weighing on the dollar is ending, and it should also be positive for the (US) stock market" said Thomas Molloy, a trader with Bank Leumi in New York.
Meanwhile, gold hit six-year highs on Thursday. By contrast, the Swiss franc, another classic refuge for global investors in times of war, didn't make a sharp gain on the day, albeit remaining near four year highs against the dollar.
Late on Thursday the dollar was trading at 118.06 yen in New York, down from 118.31 yen late yesterday.
The euro was trading at $1.0751, up from $1.0725 late on Wednesday.
Against the Swiss franc, the dollar was at 1.3621 francs, down from 1.3639 francs. Sterling was at $1.6210, up from $1.6177.
The wild card that hurt the dollar during the European trading session, dealing a blow from which it failed to recover, came from the Russian central bank's Vyugin.
Some analysts questioned whether there may be political overtones to Vyugin's remarks, that could be related to the widening rift between the US and some other potential allies about how to persuade Iraq to comply with UN weapons' inspectors requirements.
Although Russia's own foreign exchange reserves are fairly small by comparison with the world's biggest central banks, the question is, "Will other central banks follow and what does this do to the ability of the US to finance its current account deficit?" said Marc Chandler, chief currency strategist with HSBC in New York.
That deficit is currently around 5% of gross domestic product and proving to be an increasingly heavy millstone around the dollar's neck.
Much interest in global financial markets centres on the actions of Asia's heavyweights.
The region's giants, including the Peoples Bank of China, the Bank of Japan, the Hong Kong Monetary Authority, the Monetary Authority of Singapore and the central banks of South Korea and Taiwan hold more than $US1 trillion ($A1.7 trillion) of international reserves, most of which are in US dollars.
The Russian central bank's comments are one indication that "the slide in the dollar is likely to continue," partly because "central banks, if they haven't already, will be looking for (bouts of) strength in the dollar to make the switch into euros and maybe into Australian dollars," said Paresh Upadhyaya, currency analyst with Putnam Investments in Boston.
They could be tempted by the substantially higher yields of Australian government bonds as compared with Treasury's, he said.
Copyright © 2003 Associated Press
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