Dollar Bottom Elusive Before G-7


Optimism for a dollar rebound that pervaded the currency market at the start of the year is fading.

Futures traders doubled bets against the greenback in the past two months, data from the Commodity Futures Trading Commission in Washington show. Citigroup Inc., Deutsche Bank AG and Royal Bank of Scotland Group Plc, which handle almost 40 percent of global foreign exchange trading, say the currency may slump to $1.65 per euro by October.

While the dollar rose April 1 when UBS AG and Lehman Brothers Holdings Inc. said they're raising $19 billion to boost their capital, it declined the rest of the week after Federal Reserve Chairman Ben S. Bernanke acknowledged for the first time that a recession is possible. Officials of the Group of Seven nations meet this week in Washington, and are unlikely to agree on a plan to support the dollar because rising exports may be the only blessing of a weak currency in a slowing economy.

The Dollar Index, which measures the currency against six of its main counterparts, tumbled the past two months after trading little changed between October and mid-February. It's down 5.8 percent in 2008, after dropping 8.3 percent in each of the past two years.

The dollar advanced 0.3 percent to $1.5693 per euro as of 7:51 a.m. in New York, following a 0.3 percent drop on April 4. It also climbed 1.2 percent to 102.64 yen.

Futures traders have grown more bearish, as three Fed interest rate cuts in 2008 totaling 2 percentage points reduced demand for U.S. deposits. They amassed a net total of 246,101 futures contracts betting on a dollar decline versus eight other currencies, up from 126,342 on Jan. 22, CFTC data show.

Foreign private investors sold a net $37.6 billion of U.S. stocks and bonds in the six months ended Jan. 31, the most recent Treasury Department data show. The last time sales exceeded purchases over a six-month period was April 1996.

The U.S. currency received a reprieve last week. The dollar rose 0.4 percent against the euro and 2.2 percent against the yen as the recapitalization plans by UBS and Lehman Brothers boosted investor confidence in financial institutions shaken by $232 billion of losses and writedowns from the freeze in capital markets.

The weakening dollar is making American goods cheaper abroad, giving U.S. officials less incentive to halt the currency's depreciation. Exports rose 1.6 percent in January to a record, according to the Commerce Department.

Foreign sales contributed 1.02 percentage points to gross domestic product in the fourth quarter, compared with 0.85 percentage point the previous year, government data show. Without the improvement in trade, the economy would have contracted at a 0.4 percent annual pace, the first decline since the last recession in 2001, instead of expanding 0.6 percent.

The G-7 -- the U.S., Japan, Germany, the U.K., France, Italy and Canada -- hasn't intervened in currency markets since supporting the euro in 2000. They are unlikely to buy or sell currencies to prop up the dollar after meeting April 11, according to Deutsche Bank, Citigroup and Bank of America Corp. in Charlotte, North Carolina.

 

 


TradingEconomics.com, Bloomberg
4/7/2008 7:05:13 AM