| Random Character |
|---|
|
| Currency trading: No dollar gain without pain? |
|
|
|
|
The dollar is experiencing some of its biggest gains in years against the yen and other Asian currencies, lowering prices for Americans on many imports while threatening U.S. economic growth and reviving legislation aimed at protecting domestic manufacturers.
A prolonged weak yen would have significant implications and perhaps even rekindle U.S.-Japan trade tensions. The weak yen could boost Japan's economy by making its products more competitive at the expense of U.S. companies, particularly the struggling auto industry, which is shedding assets and workers to cut costs. Toyota Motor is expected to see a boost of 5 percent to 10 percent to its profit just from the dollar's strength during the year ending in March. This week the dollar hit a 25-month high versus the yen and is now up 14 percent this year against the Japanese currency. That is the dollar's biggest rise since it gained 16 percent versus the yen in 2001. Other Asian currencies, such as the Singaporean dollar and Taiwanese dollar, have also stumbled relative to the dollar over the past several weeks. In addition, the dollar has risen 12 percent this year against the euro, and has chalked up advances against other European currencies. The dollar's gains mark a reversal for the U.S. currency, which fell against most major currencies from 2002 to 2004 and lost nearly half its value against the euro during that period. Analysts had widely expected the dollar to continue its selloff in 2005. Perhaps the biggest surprise is its strength against the yen. Those gains have come even as Japan's economy appears to be at the start of a significant turnaround -- potentially ending more than a decade of sluggishness -- and the Tokyo stock market is hitting multiyear highs. "At the start of the year, the investment community was very bullish on Asia," says Nick Bennenbroek, senior currency strategist for Brown Brothers Harriman in New York. "The currencies' performance is clearly surprising." One piece of the puzzle: In Japan, interest rates have stayed low to jump-start the economy, while in the U.S. the Federal Reserve's interest-rate increases have continued for longer than many observers expected. Tuesday, the Fed boosted the short-term rate by a quarter point to 4 percent. This has produced an unexpectedly wide gap between rates, which helps the dollar by luring in foreign money in pursuit of higher returns. Indeed, a significant chunk of money is coming to the U.S. from Japan. The strengthening economy there is making the Japanese feel richer and more eager to invest. But investing at home is relatively unattractive with long-term interest rates still around 1.5 percent. So Japan's newly confident investors are sending more money overseas, buying up U.S. Treasury bonds, mutual funds that invest in foreign bonds and even real estate, like hotels in Guam. "They are buying everything from New York real estate to American securities to corporations to their hard assets," says Jesper Koll, an economist for Merrill Lynch Japan. "That's what's driving the currency market." During the first eight months of this year, Japanese investors poured a net 14.5 trillion yen, or $126 billion, into foreign stocks and bonds, up 19 percent from the same period the previous year. If the current pace continues, such investments for 2005 will be the highest since 1989, when the government started compiling the current data, surpassing last year's $174 billion. To buy dollar-based assets, investors first have to sell their yen to buy the U.S. currency, which makes the yen weaker against the dollar. A stronger dollar would likely reignite support in Congress for protectionist measures. But unlike the 1980s, when Japan bore the brunt of protectionist sentiment, this time lawmakers have their sights on Beijing. China closely controls the value of its currency, the yuan, and doesn't let it trade freely, and some lawmakers in Washington argue that China is keeping the yuan artificially low against the dollar to boost Chinese exports. That has stirred a political debate in the U.S. over whether the undervalued yuan gives Chinese companies an unfair price advantage over U.S. rivals. In July, China did let the yuan strengthen slightly against the dollar, a move that was welcomed at the time in Washington. More recently, however, the Bush administration appears to be growing impatient waiting for further action. This week Treasury Secretary John Snow reiterated at a speech in Detroit that he will continue to press Chinese officials "to make progress on reforming their foreign-exchange regime." Separately, Sen. Charles Schumer (D., N.Y.) says he still intends to bring to the floor before year's end a bill that could impose tariffs on Chinese goods unless China acts to further strengthen its currency. "China's currency manipulation is no longer going to be greeted with a wink and a nod by the U.S. Senate," Mr. Schumer said this week. He said he believes the yuan is still undervalued against the dollar by 30 percent to 40 percent. With the dollar gaining strength and making foreign goods less costly, imports have been rising. Over the first eight months of this year. U.S. imports totaled $1.1 trillion, up 15 percent from $950 billion in the year-earlier period, according to the Bureau of Economic Analysis. Some economists argue that economic impact of a rising dollar this time will be less than in previous periods of dollar strength. While U.S. companies are increasingly outsourcing labor and production to China, these economists say, the impact of the outsourcing is offset somewhat by the fact that the Chinese currency remains closely linked to the dollar. A sustained period of dollar appreciation will hurt some exporters and could cause the trade deficit to widen further, "But the impact will be minimal because the real action on our trade balance is with the yuan," says Carl Weinberg, chief economist for High Frequency Economics, an economics research firm in Valhalla, N.Y. Other economists, however, still see the fallout from a strengthening dollar as more far-reaching, since about a quarter of U.S. imports this year came from Japan and the 12 countries that use the Euro -- parts of the world where the dollar has undergone a significant swing. Despite the dollar's recent strength, most foreign-exchange analysts remain undeterred that an Asian currency rally simply has been delayed -- not derailed. A recent Dow Jones Newswires survey of 20 leading currency dealers sees the dollar holding its gains for the rest of the year but the yen surging back in 2006. "I still believe Asian currencies are glaringly undervalued," says Christopher Wood, a stock market strategist for the Hong Kong-based brokerage firm CLSA Asia-Pacific Markets. "They will rally when the Fed stops tightening." Source: www.post-gazette.com Nov 2, 05 |
| < Prev | Next > |
|---|