Dollar slides, raising worry
A dive in the dollar rattled Wall Street on Friday by raising fresh concerns about the economy and inflation.
The U.S. currency hit a 20-month low against the euro and also fell sharply against the Japanese yen, the British pound and other major rivals.
The decline, a continuation of a sell-off that began Wednesday, was a reminder of the risks the nation faces because of its huge budget and trade deficits, which have been heavily financed by foreign investors. They now control massive amounts of dollars.
The Dow Jones industrial average slid 46.78 points, or 0.4%, to 12,280.17, and was down 0.5% for the week. The trading session ended three hours early, as usual on the Friday after Thanksgiving.
In New York trading, the euro surged to $1.309 from $1.294 on Wednesday. The rally left the European currency at its highest level since March 2005.
The dollar fell to 115.75 yen, a three-month low, from 116.80 on Wednesday.
U.S. markets were closed Thursday for the Thanksgiving holiday, and currency trading was thin Friday. That probably exaggerated the dollar’s moves, analysts said.
“We need to see how this trades on Monday,” said Paul Kasriel, an economist at Northern Trust Co. in Chicago.
Still, he and other experts said there were strong reasons that the dollar could be entering a sustained slide, after mostly treading water in recent months.
“Clearly, the fundamentals have shifted against the dollar,” said Brian Wesbury, chief economist at First Trust Advisors in Lisle, Ill.
One issue is that a weakening U.S. economy, particularly in the housing and manufacturing sectors, may be reducing some foreign investors’ appetite for U.S. stocks, bonds, money market securities and other assets, experts say. That, in turn, would tend to deflate the dollar.
U.S. short-term interest rates are among the highest in the industrialized world. But that may change in 2007: A softer U.S. economy could boost the likelihood that the Federal Reserve will cut short-term rates.
At the same time, the European Central Bank and some other foreign central banks have been raising interest rates in response to stronger-than- expected economic data.
The U.S. Fed has kept its benchmark rate at 5.25% since June. By contrast, the Bank of England lifted its key rate to 5% from 4.75% on Nov. 9. The European Central Bank’s rate was raised to 3.25% from 3% on Oct. 5.
Higher interest rates abroad would tend to draw more money to those economies, lifting their currencies.
A German business confidence survey released Thursday may have contributed to the euro’s strength against the dollar: The so-called Ifo survey showed business optimism at a 15-year high this month. That may put more pressure on the European Central Bank to continue tightening credit, analysts said.
Another issue dogging the dollar is concern that China and other countries that hold trillions of dollars’ worth of U.S. securities may increasingly seek to trim those assets in favor of non-dollar-denominated securities.
“The Chinese have been making noises in recent weeks about diversifying their holdings of foreign reserves,” Kasriel noted. A People’s Bank of China senior official repeated that theme in comments circulated Friday.
The momentum of a falling dollar could feed on itself because each decline reduces the value of foreigners’ remaining U.S. assets.
The risk of a sell-off of U.S. securities by China has been a persistent concern for Wall Street in recent years, but it may be taking on more urgency now that the Democratic Party is about to regain control of Congress, analysts said. Some Democratic leaders are pushing for trade sanctions against China to shrink that country’s massive trade surplus with the U.S.
China, in turn, could retaliate by dumping dollar-denominated assets, experts note.
A major threat to the U.S. economy from a tumbling dollar would be higher inflation, because a weaker currency could drive up prices of the imported goods that consumers relish.
At a minimum, Americans’ purchasing power abroad would sink. “It costs you more to travel to Europe today than it did yesterday, and it costs you more to buy French wine or Burberry coats,” Wesbury said.
But Treasury bond investors would be expected to react negatively to the risk of higher U.S. inflation, and there was no sign of concern in that market Friday: The bellwether 10-year Treasury note yield ended at 4.55%, down from 4.56% on Wednesday and near a nine-month low.
In the stock market, with few players active, most key indexes were modestly lower. The Standard & Poor’s 500 index eased 5.14 points, or 0.4%, to 1,400.95. The Nasdaq composite slipped 5.72 points, or 0.2%, to 2,460.26.
Oil and gold futures markets were closed for the day.
There would be advantages to a falling dollar. Many U.S. companies might welcome a weaker greenback because it would make it easier for them to compete with foreign rivals.
And Americans who own foreign stocks and bonds could benefit because stronger foreign currencies mean that assets denominated in those currencies are worth more when translated into dollars. The dollar’s slump in 2003 and 2004 was a windfall for U.S. investors who owned foreign securities.
A falling dollar “is more negative than positive, but there are some positives, no doubt about it,” Wesbury said.
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walter.hamilton@latimes.com
