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Dollar Declines as U.S. May Tolerate Currency's Drop
Nov. 12 (Bloomberg) -- The dollar fell the most in five weeks against the yen and weakened against the euro on speculation the Bush administration doesn't share the concern of Japanese and European officials about the U.S. currency's slide.

Global currency, equity, emerging-market debt and other financial markets are operating in an orderly and favorable way, a U.S. Treasury official said, declining to comment about Bush administration dollar policy or the dollar's level or direction. The official spoke in Washington on condition of anonymity.

``The U.S. will continue to have a benign-neglect policy -- they may say they want a strong dollar but continue to let it decline'' as a way to narrow the trade deficit, said Carsten Fritsch, a currency strategist in Frankfurt at Commerzbank AG. ``It wouldn't make sense to take action against the market and isn't in their interest.''

Against the yen, the dollar is down 1.1 percent today and 3.9 percent in the past month, dropping to 105.51 at 12:57 p.m. in New York from 106.63 late yesterday, according to electronic currency dealing system EBS. The dollar was at $1.2974 per euro, from $1.2906, down 5 percent in the past month. It fell to $1.3006 two days ago, the weakest since the euro's 1999 debut.

Against a basket of currencies tracked by the Federal Reserve, the U.S. currency has shed 21 percent since President George W. Bush took office in 2001 and reached a nine-year low on Nov 8. Goldman Sachs Group Inc. cut its dollar forecast, saying the U.S. won't protest a decline to narrow its trade gap.

`Back Seat'

The dollar remained lower against the yen, erasing a weekly gain, even after the Commerce Department said retail sales advanced 0.2 percent in October. The median forecast of economists surveyed by Bloomberg was for a gain of 0.1 percent. The University of Michigan's consumer confidence index climbed to 95.5 this month from 91.7.

``The market is not trading on the economic data. It's a much more policy-charged environment,'' said Sophia Drossos, a currency strategist in New York at Morgan Stanley who used to work at the Fed. ``Until we get more clarity on the policy front, economic data are going to continue to take a back seat.''

The dollar will trade between $1.2850 per euro and $1.30 per euro heading into next week, and it will remain between 105 yen and 107 yen, Drossos said.

U.S. Treasury Secretary John Snow, who hasn't spoken about the dollar since Oct. 28, travels to Europe next week for a meeting in Berlin of finance ministers from the 20 largest countries.

The Fed's Trade-Weighted Major Currency Dollar Index has fallen 4 percent since the last week of September, reaching a nine-year low of 81.36 on Nov. 8.

`Aggressive Action'

The Bush administration hasn't changed its ``strong-dollar policy,'' said Treasury spokesman Rob Nichols said today, adding the Treasury doesn't comment on daily ``market fluctuations.''

``We believe that currency values are best set in open, competitive markets,'' Nichols said.

Japanese Vice Finance Minister Hiroshi Watanabe said yesterday currencies are moving rapidly and the dollar's slump deviates from economic fundamentals. Watanabe, who is in charge of currency policy at the finance ministry, told reporters in Tokyo that Japan will ``take aggressive action'' if necessary.

The yen gained to a seven-month high against the dollar on Nov. 8.

European Central Bank Vice President Lucas Papademos said ``excess volatility is not desirable'' in the currency market because it hurts economic growth, at a press briefing in Tokyo today. At least six other ECB policy makers, including bank President Jean-Claude Trichet, made similar comments this week.

Bush Speculation

With U.S. officials ``not saying anything at all, investors are making up their own minds about the merits of the dollar,'' said Ryan Faulkner, a currency strategist in London at Lehman Brothers Holdings Inc., the most accurate currency forecaster in a quarterly Bloomberg survey. ``I don't know what a strong-dollar policy means.''

Lehman predicts the dollar will fall to $1.34 per euro in 12 months and to 99 yen.

The Bush administration will tolerate a weaker dollar, the Nikkei Financial Daily newspaper said, without citing anyone. The report echoed a Wall Street Journal article two days ago that said, without citing a source, the U.S. is comfortable with a falling dollar, which may help to narrow the U.S. deficit in the current account, the broadest measure of trade.

A cheaper currency may make exports more competitive by allowing U.S. companies to lower prices.

``As more influential papers report a shift in U.S. currency policy, that augments simmering suspicion that the U.S. strong- dollar policy is becoming a mantra,'' said Tsutomu Soma, a currency and derivatives trader in Tokyo at Okasan Securities Co. The dollar may drop to 103.50 yen this year, he said.

Goldman Cuts Forecast

Goldman Sachs lowered its forecasts for the dollar to 98 yen in three months, from a previous projection of 105. Against the euro, the bank, the sixth-largest currency trader according to Euromoney magazine, now predicts the dollar will fall to $1.35 in three months, compared with $1.27 before.

The gap in the current account, which includes some investment flows, was a record $166.2 billion in the second quarter, equivalent to 5.7 percent of gross domestic product. The U.S. must attract about $1.8 billion in foreign capital a day to compensate for the deficit and maintain the dollar's value, according to Bloomberg calculations.

The yen's advance against the dollar accelerated after it passed through 106.30 and 106, where so-called stop-loss orders were placed, said Takashi Toyahara, executive director of foreign- exchange trading at Nomura Securities Co. in Tokyo.

Traders sometimes place such pre-set orders to limit losses in case their bets go the wrong way.

`Dimmer' Outlook

Stronger currencies may damp economic growth by making exports more expensive abroad. A government report today showed Japan's economy unexpectedly slowed in the third quarter. Growth in the 12-nation euro region also slumped in the July-to- September period, a European Union report showed.

``It's more evident that the outlook for export-led recoveries in Japan and Europe are becoming dimmer,'' said Shimpei Uike, who invests in overseas debt at Asahi Life Asset Management in Tokyo. ``It's only natural there will be some more discomfort that we'll hear from the regions.''

Japan's economy expanded at a 0.3 percent annualized pace, less than the 1.1 percent growth rate in the previous quarter and below the 2.1 percent median forecast in a Bloomberg survey.

``The failure for the yen to fall after the GDP numbers just highlighted the weak sentiment for the dollar,'' said Toyahara at Nomura.

Economic growth in the 12-nation euro region slowed in the third quarter to 0.3 percent, after the economy expanded 0.5 percent in the previous three months. The median forecast was for a 0.4 percent expansion.

Last Updated: November 12, 2004 13:00 EST

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