May 1, 2003

Dollar Falls to 4-Year Low Against Euro
International Herald Tribune

The dollar tumbled to a four-year low against the euro today, as weak economic data, low American interest rates and the growing federal budget deficit encouraged foreign-exchange traders to continue seeking higher-yielding currencies elsewhere in the world.

The euro traded as high as $1.1284 today, up from $1.1179 late Wednesday. In late trading this afternoon, the euro was quoted at $1.1232, putting it within 5 cents of its initial value of $1.17 when it was introduced in January 1999 as the single currency for 12 of the 15 members of the European Union. Since then, it has consistently traded below that level, dropping as low as 82.3 cents in October 2000.

But since last year, the euro rebounded, sending the dollar sharply lower. This week alone, the dollar has dropped about 2.5 percent.

The United States requires about $1.5 billion a day in new capital from overseas just to keep the dollar from falling because of a huge imbalance between American imports and exports of goods and services. Yet the net inflow of foreign money invested in American securities fell to roughly half that level in February, the lowest rate in a year, according to the United States Treasury.

"Foreigners appear to be questioning the relative attractiveness of U.S. assets," said Rebecca McCaughrin, an economist at Morgan Stanley.

Analysts say there are several reasons why global investors, who poured money into the United States during the market bubble years, are getting nervous.

After a series of scandals over corporate accounting and brokerage firms' practices, trust in American financial markets remains shaky, some analysts say.

American interest rates, pushed aggressively lower by the Federal Reserve in an effort to stimulate economic growth, are far below European levels, reducing the appeal of United States bonds. Foreigners in February sold a net $5 billion of Treasury securities and $8.6 billion in securities issued by United States government agencies.

Analysts say central banks around the world are also starting to shift a greater portion of their reserves into euros and out of dollars. And the American economy, while likely to outperform the European single currency zone this year, may not do so by a great enough margin to offset other negatives.

Given those ankle weights, the United States current account deficit of nearly $600 billion now looks to many investors like a heavy burden.

"The argument that the dollar should be strong because U.S. policymakers are more flexible and growth-oriented than their European or Japanese counterparts does not make sense," said Alex Patelis, currency strategist at Merrill Lynch. "It is not a matter of growth."

Even if, as other analysts maintain, economic performance is the fundamental factor driving the currency markets, the latest numbers do not make an attractive advertisement for the dollar. A report today showed that activity among American corporate purchasing managers was surprisingly feeble in April, culminating a week of data suggesting that economic growth in the United States may not be much above the 1 percent expected in the euro zone this year.

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