Dollar Gains Against Euro; G-7 Objects to `Excess Volatility'
Feb. 9 (Bloomberg) -- The dollar advanced against the euro in Asia after Group of Seven finance ministers said they want to avoid ``excess volatility'' in currency markets, according to traders and strategists interviewed after Saturday's G-7 meeting.
By including the phrase in their statement, the ministers endorsed the comments of European Central Bank President Jean- Claude Trichet, who has said the euro's 17 percent surge over the past year may damp demand for exports and hurt economic growth.
``There now seems to be an acknowledgement that the U.S. dollar has fallen far enough against the euro, at least in the short term,'' said Alex Schuman, manager of foreign exchange strategy at Commonwealth Bank of Australia in Sydney.
Against Europe's common currency, the dollar traded at $1.2596 at 8:33 a.m. in Wellington, from $1.2706 in New York late on Friday. Versus the yen, the dollar bought 105.69 from 105.49 late Friday.
``The group may have felt euro-dollar had gone too far,'' Deutsche Bank AG strategists Marshall Gittler in Tokyo and Peter Redwood in Singapore, wrote in a report Sunday. The dollar may strengthen to as much as $1.20 in the next few weeks, they said.
Deutsche Bank, the third-largest trader in the currency market, was the most accurate forecaster of exchange rates in the fourth quarter, according to a Bloomberg survey of 53 companies. Citigroup Inc. global currency strategist Robert Sinche predicts the euro may trade between $1.23 and $1.27 in coming days.
`Small Victory'
The G-7 statement is ``a small victory for the Europeans,'' Paul Mackel, a currency strategist in London at ABN Amro Holding NV, said in an interview after the meeting. ``People who ran the dollar down on Friday may unwind some of those short positions.''
``Excess volatility and disorderly movements in exchange rates are undesirable for economic growth,'' G-7 ministers and central bankers said in a joint statement. ``We emphasize that more flexibility in exchange rates is desirable for major countries or economic areas that lack such flexibility.''
Officials from the G-7, which comprises the U.S., Japan, Germany, France, Italy, Britain and Canada, met for two days of talks in Boca Raton, Florida. The euro has climbed 12 percent against the dollar since the previous G-7 meeting in Dubai on Sept. 20, when the group sought ``more flexibility'' in exchange rates. The words ``excessive volatility'' were absent in Dubai.
As recently as Friday, some traders anticipated a different start to the week after the euro gained 1.3 percent against the dollar. The Labor Department said the U.S. economy added 112,000 non-farm jobs in January, fewer than the 175,000 median forecast of economists surveyed by Bloomberg News.
``There may be a slight dip in euro-dollar, but it will be short-lived,'' Ian Stannard, a currency strategist at BNP Paribas SA in London, said on Sunday. ``While it's a watering down of the previous statement, there is no mention of them threatening action.''
Fifty-seven percent of the 58 strategists, traders and investors polled from Tokyo to New York on Friday recommended selling the dollar against the euro, a reversal from the 56 percent who said to buy the U.S. currency a week ago. Forty-five percent advised selling the dollar this week against the yen.
`More Gradual' Decline
``The dollar's weak trend may not reverse, but the speed of the slide may be more gradual from now on,'' said Xinyi Lu, chief strategist in Tokyo at UFJ Bank Ltd., a unit of Japan's fourth- biggest lender. ``Some people may buy back the dollar in early morning trade, but it may start to soften in the later part of Monday's trading.''
The euro may rise to $1.30 in the next two months, Lu said. The yen may rise to 105 per dollar this week, though its advance will be limited by yen sales from Japan's government, said Lu. The Bank of Japan may sell the currency at about 105.20, he said.
``The G-7 statement doesn't call for a reverse of the dollar's decline, therefore it will slide, but in a more orderly and gradual manner,'' said Minoru Shioiri, manager of treasury and foreign exchange at Mitsubishi Securities Co. in Tokyo. ``Upward pressure on the yen may continue, leaving the way open for authorities to keep selling the yen.''
Futures traders raised bets the yen will rise against the dollar, according to figures from the Commodity Futures Trading Commission on Friday. The difference in wagers by hedge funds and other large speculators on a gain in the yen compared with those on a drop -- so-called yen net longs -- rose to about 64,500, the most since at least December 1984, when Bloomberg records begin.
Tanigaki Defends Policy
Japan sold a record 5.9 trillion yen ($55.6 billion) in the fourth quarter. It sold as much as 1.3 trillion yen on Dec. 10, the fourth-biggest amount sold in a single day, the Ministry of Finance said on Friday.
The G-7's call for ``more flexibility'' in currency markets is not aimed at Japan, which will act to halt any rapid yen gains, said the country's finance minister, Sadakazu Tanigaki.
``Japan's currency is not one that lacks flexibility,'' Tanigaki said at a press conference in Boca Raton.
Friday's jobs report added to speculation the U.S. Federal Reserve will keep its target interest rate at a four-decade low of 1 percent, half the level of the ECB. Low rates relative to Europe will discourage some investors from buying U.S. assets, such as bonds, said Lara Rhame, a currency strategist at Brown Brothers Harriman in New York.
``International capital flows are pushing the dollar lower,'' said Rhame, who used to work at the Fed, in a telephone interview after the G-7 meeting. ``That process is going to continue independent of what policy makers say.''
To contact the reporters on this story:
Sineva Toevai in Wellington stoevai@bloomberg.net
To contact the editor for this story:
Walter Krumholz in Tokyo at wkrumholz@bloomberg.net
Last Updated: February 8, 2004 14:55 EST
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