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msnbc.com
updated 12/10/2004 7:38:47 AM ET 2004-12-10T12:38:47

The U.S. dollar gained ground against other major world currencies Thursday, adding to modest gains made Wednesday. The upturn raised questions about whether the leading international currency is taking a breather after a two-month slide that has driven it to multi-year lows, or if it is building a sustainable recovery.

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The greenback has lost about 7 percent of its value against other world currencies since mid-October, hitting a new all-time low against the euro and a five-year low against the Japanese yen. In fact, the dollar has fallen steadily against the euro since early 2002.

While a weaker dollar can help the U.S. economy by making U.S. exports cheaper overseas, it can have a reverse impact abroad.

Indeed, European and Japanese officials have voiced concern over the dollar's weakness, saying it could hurt their economic recoveries. And currency traders have worried that officials in those countries may take action to prop up the dollar, thereby stemming the potentially damaging rise in their own currencies.

Those worries were contributing to the dollar’s rise Thursday said Peter Cardillo, chief strategist at New York retail brokerage S.W. Bach. Cardillo also said he is skeptical that the U.S. currency’s recent rise suggests a longer-term revival.

“I think that more and more European and Japanese officials have been openly talking about the possibility of intervention, and that gets traders nervous, so they are stepping in and taking some profits [from the yen and the euro],” said Cardillo.

“Longer term, I think the dollar will continue to decline unless there’s a clear signal out of Washington that they don’t want that to continue. Until that happens, the deficit will give currency speculators the upper hand,” he added.

No U.S. intervention seen
U.S. policy-makers look unlikely to step in to counter the dollar’s decline. So far, officials like U.S. Treasury Secretary John Snow have simply reiterated the Bush Administration’s strong dollar policy, but they have not indicated they are likely to intervene.

The dollar’s most recent slump came in mid-November after U.S. Federal Reserve Chairman Alan Greenspan warned of the dangers of America's growing trade deficit, saying it is unsustainable because foreigners would eventually lose their appetite for dollar-denominated assets.

The specter of the deficit remains, and that makes Carsten Fritsch, a currency analyst at Commerzbank in Frankfurt, skeptical that the dollar’s recent gains would last. “We don’t believe there is a trend against the euro,” he said. “We expect the dollar to weaken further. The deficit problem is still there and there’s no sign the U.S. government will tackle it.”

The U.S. currency’s downward turn over the last few months has raised concerns about its impact on the global economy, although in the United States its relatively orderly decline is seen as mostly beneficial for the economy and businesses.

Peter Cardillo said he thinks there is still a possibility that the dollar could fall precipitously. “Could we be headed for a free fall in early 2005? That option is still there, and that would be negative for the U.S. economy,” he said.

Japanese data buoy dollar
Analysts say a catalyst for the upturn in the value of the dollar has been weaker-than-expected economic data in Japan, which stoked concerns that the country’s recovery is slowing and sent Tokyo’s main market index down by 1.5 percent Thursday.

Also helping the dollar to rise was news in the United States Wednesday from the U.S. Energy Department, which issued a report that shows U.S. stocks of crude and heating oil rose more than expected last month.

Also, German Chancellor Gerhard Schroeder briefly weighed in on the strong euro during a trip to Japan, suggesting that the European Central Bank could try to dampen its rise. Intervention in the foreign exchange market could involve buying dollars, selling euros or a combination of the two.

“I know about the independence of the European Central Bank. But one hint I want to give is one can sometimes learn something from Japan and its excellent currency policies,” Schroeder said.

He didn’t elaborate, but Tokyo is known for actively selling yen for dollars on the markets to keep its currency from rapidly appreciating.

The dollar bought 104.50 Japanese yen in late New York trading, up from 104.04 yen late Wednesday. The euro dipped to $1.3321 in late European trading, down from $1.3335 late Wednesday, as traders cashed in on the currency’s strength. The euro hit a record high of $1.3470 on Tuesday. The 12-nation currency has shot up from around $1.20 in September.

The Associated Press contributed to this report.

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