NEW YORK (AP) — The dollar weakened against its major rivals Tuesday — sharply so against the British pound — after shrugging off another round of mildly positive U.S. economic data to once againhit new lows.
The relentless dollar selling of late continued, particularly from short-term speculative accounts and hedge funds, which sent the dollar to new record low against the euro, a seven-year low against the Swiss franc and a six-year low against the Australian dollar in European trading.
Data released from the U.S. later Tuesday that showed the current account gap narrowing slightly in the third quarter and the biggest monthly jump in industrial production in November in over four years failed to boost the dollar’s fortunes. The market chose instead to focus on a surprising fall in November’s consumer price index, which could push further out on the horizon a rise in interest rates and therefore keep foreign capital from U.S. shores. Sterling quickly took up the baton in New York trading and surged to a new 11-year high.
Only a gradual recovery as dealers booked profits lifted the greenback off these lows.
“The CPI (numbers) validates the Federal Reserve’s decision to retain its accommodative policy,” said Ashraf Laidi, chief currency analyst at MG Financial in New York. “This instills the interest rate disadvantage hurting the dollar.”
Headline CPI fell 0.2 percent in November after being unchanged the month before. Economists had expected no change. But the core measure, which excludes more volatile food and energy prices, posted its biggest decline in 21 years, falling 0.1 percent after a 0.2 percent increase in October. It was expected to rise 0.1 percent.
With U.S. interest rates at a 45-year low of 1 percent in a climate where improving economic conditions are pushing other central banks around the world toward increasing rates, investors are looking elsewhere for yield.
This makes it harder to fund the U.S. current account deficit, which narrowed in the third quarter to $135 billion from an upwardly revised $139.4 billion in the second quarter, intensifying the downward pressure on the dollar.
“The market’s been focusing on interest rates and the current account deficit,” and the difficulty the U.S. faces in attracting capital, said Meg Browne, currency strategist at HSBC in New York. “And that theme’s still running.”
In late trading in New York Tuesday, the euro was at $1.2325, up from $1.2305 late Monday in New York but off its new high Tuesday of $1.2360.
Europe’s single currency was also at 122.52 yen, slightly up from 132.43 yen late Monday.
The dollar was at 107.49 yen compared with 107.57 yen, and at 1.2600 Swiss francs, rebounding from the new low of 1.2561 but still down from 1.2612 francs late Monday. Sterling was at $1.7539, hovering around its new high of $1.7546 and almost a cent up from $1.7456 late Monday in New York.
The Australian dollar peaked as high as $0.7457 before easing back slightly, while the New Zealand dollar also hit a fresh six-year high, at $0.6527, before easing back.
Michael Woolfolk, senior currency strategist at Bank of New York, said that although the headline current account deficit narrowed, the non-seasonally adjusted gap is actually wider at $145.5 billion, a record.
“Simply put, the current account can no longer be financed at (minus) 5.0 percent,” of gross domestic product, Woolfolk said. Either the deficit narrows on slower GDP growth, the Treasury intervenes directly in the currency market to support the dollar, or the Fed hikes rates to attract investment. “Unfortunately for the dollar, the likelihood of any of these happening just now is close to zero.”
This is bad news for U.S. exporters, who need to repatriate their foreign currency revenues.
“U.S. corporate interest to buy dollars is just being overwhelmed by fund interest” to sell, said a dealer at a U.K. bank in New York.
On the other side of the fence are European exporters, who must be starting to feel the pinch from the euro’s record strength, analysts say.
“They are hurting, no doubt,” said a London-based foreign exchange sales trader, noting that some corporations who had budgeted for the euro to end the year at $1.20 are now expecting a rate of $1.25.
In its latest fund manager survey Tuesday, Merrill Lynch said it expects the euro to continue strengthening in 2004, reaching $1.33 in a year’s time.
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Jamie McGeever is a correspondent for Dow Jones Newswires.
