Archie's Corner

[jmhollen]

FOREX-Dollar rebounds, buoyed by narrower U.S. trade gap
Reuters, 01.14.04, 9:55 AM ET
By Gertrude Chavez

NEW YORK, Jan 14 (Reuters) - The dollar climbed against major currencies on Wednesday following a surprisingly narrower than expected U.S. trade deficit.

The trade gap, often cited as a key reason for the dollar's persistent weakness, narrowed to a deficit of $38.0 billion in November, from a $41.58 billion gap in October. Market expectations were for a trade shortfall of $42 billion.

"We did see a narrowing of the trade deficit coming on the heels of calming comments of Fed Chairman Alan Greenspan yesterday concerning the current account deficit," said Alex Beuzelin, foreign exchange market analyst at Ruesch International in Washington DC.

Greenspan, speaking at a Bundesbank conference in Berlin on Tuesday, said there is, for the moment, little stress in the funding of the gaping U.S. current account deficit -- a broad measure of the nation's global trade.

"Today's data may alleviate those concerns in the near term, which should be a positive for the dollar," he added.

In early New York trade, the euro fell 0.8 percent to $1.2654 <EUR=>, more than two cents firmer than the dollar's record low near $1.29 per euro hit on Monday. The euro also slipped 1 percent against the yen to 134.22 yen <EURJPY=>.

Against the yen, the dollar was nearly flat at 106.12 yen <JPY=>, just above a 3-year low around 106 yen set a week ago.

The dollar's relative stability against the Japanese currency is largely owing to market wariness the Bank of Japan could step in to curb the yen's gains at any moment, after the central bank was detected intervening last week.

The greenback also rose 1 percent against the Swiss franc to 1.2334 francs <CHF=>, after falling to a 7-year low on Monday. The pound, meanwhile, was down 0.6 percent at $1.8350 <GBP=>. The U.S. currency also surged over 1 percent against the Canadian dollar to C$1.2870 <CAD=>.

U.S. producer prices showed fairly benign inflation, rising 0.3 percent in December, suggesting the Fed will be able to keep monetary policy accommodative for some time. Stripping out volatile food and energy prices, the index fell 0.1 percent.

"What this means is that the dollar will continue to be saddled with negative interest rate differential," said Beuzelin.

U.S. NONCHALANCE

Markets also weighed European concerns about the greenback's drop against apparent U.S. nonchalance.

European Central Bank council member Christian Noyer was among the latest European policymakers to comment, saying authorities remained vigilant on the euro's level but there was no need to over-dramatize, although intervention was always "something that can be used."

Greenspan on Tuesday said the dollar's decline had yet to cause inflation or deter foreign capital inflow needed to fund the U.S. current account deficit.

"Without the warning comments from Europe we would have tested $1.30 this week," said Mark Henry, currency strategist at GNI.

"With the G7 meeting starting to loom on the calendar as well, people are looking at the timing of that and suggesting we may be heading towards a situation where there may be some coordinated move to try to stabilize things a bit."

Finance Ministers and central bankers from the Group of Seven most developed economies are scheduled to meet in Florida on Feb 6 and 7. (Additional reporting by Burton Frierson on London)

Copyright 2004, Reuters News Service