Will growing fears of U.S. economic problems spark a Dollar sell-off?
*Financial Times, by Tony Tassell and Neil Dennis, November 24, 2006
“The dollar suffered a steep sell-off this week amid expectations of a further slowdown in the US economy.
The greenback fell most sharply against the euro as the prospect of rising European interest rates contrasted with forecasts of easing US monetary policy.
It broke through the psychological $1.30 threshold against the euro to hit a 19-month low against the shared currency.
The dollar also lost ground against sterling, slumping to a 1½-year low.
The sell-off, accentuated by thin trading volumes, drove up prices of dollar-denominated commodities like gold and depressed European shares on expectations that dollar weakness would hit revenues earned in the US currency.
As US markets were closing on Friday, the euro stood at a 19-month high of $1.309, up 1.2 per cent, while sterling gained 0.9 per cent to a 1½-year peak of $1.9333. The yen climbed 0.5 per cent to Y115.66.
Over the week, the dollar was about 2 per cent weaker against the euro, extending its slide this year to more than 10 per cent.
Apart from interest rate differentials between the US and Europe, analysts said the dollar had been hit by seasonal weakness and reports of unwinding of some carry trades – borrowing in low interest rate currencies to invest in high-yielding assets elsewhere.
There was also increased speculation of diversification of foreign exchange reserves held by central banks. Some analysts predicted further weakness in the US currency.”
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