Dollar Falls Against Euro and Yen as Economic Worries Grow
The dollar tumbled Thursday to three- and two-month lows against the euro and yen, respectively, as concerns over a weakening U.S. economy seeped into a lightly traded market.
The euro zone currency spiked higher against the dollar in the wake of the Federal Reserve’s “beige book” report Wednesday and rising hopes for a potential cut in interest rates by the European Central Bank at its next meeting Aug. 30.
“The beige book painted a much grimmer picture for the U.S. economy going forward, hammering the dollar in the process against just about everything,” said Jim Griffin, vice president and foreign exchange advisor at Union Bank of California.
The ECB’s admission Thursday that it was uncertain of potential economic growth in the second half of the year was viewed as putting the bank more in line with its peers by shifting its stance away from price stability and more toward encouraging economic growth.
“The market is ready to reward the euro if the ECB cuts rates and improves the growth prospects for the euro zone,” said David Gilmore, partner at Foreign Exchange Analytics.
Economists polled in the latest Reuters survey put the chances for a rate cut at the Aug. 30 ECB meeting at 50-50.
In late trading, the euro was at 89.20 cents, a gain of 1.1%, its largest one-day percentage increase since July 18. The euro zone currency reached as high as 89.41 cents, its highest level since May 4.
The greenback plummeted to as low as 121.38 yen, its lowest level since June 15, before gaining ground to trade at 121.92 yen, a loss of 1.38% compared with the previous New York close. The drop marked the biggest percentage loss in a single session since May 23.
As for the yen, questions over proposed structural reforms by Prime Minister Junichiro Koizumi and whether the Bank of Japan will ease monetary policy point to a weaker currency.
But analysts say the yen’s refusal to fall reflects widespread confusion among currency traders over how the government will juggle competing interests.
“The Bank of Japan [says] one thing and the Ministry of Finance says another,” said Paul Podolsky, currency strategist at Fleet Bank. “As long as that continues, it doesn’t leave people much clarity.”
Furthermore, analysts say speculation that Japanese investors could repatriate a mountain of overseas investments to cover domestic stock losses was giving the yen a boost.
Japanese officials, meanwhile, were doing their best to talk down the yen, with Finance Ministry foreign exchange chief Haruhiko Kuroda repeating the now-standard line that a lower currency would be acceptable if it followed Bank of Japan monetary easing.
