Concerns dollar may be heading for crisis

FEARS that the dollar is heading for a crisis were raised yesterday as the euro broke through $1.27 for the first time.

Analysts are increasingly of the view that the euro could climb to as high as $1.35 within the next few months, a level deemed impossible a few months ago.

On the markets yesterday, the euro, trading well below its opening rate to the dollar of $1.17 for most if its existence, has taken on a new buoyancy.

By late yesterday afternoon the euro had climbed to $1.1753, having closed on Monday in New York at $1.2669.

Analysts said there was no obvious reason for yesterday’s dip.

It has become fashionable to point to the huge current and trade deficits in the US, projected at close to $450 billion for 2004, for the rapid demise in the greenback’s performance over the past few weeks.

The dollar’s fall to a record low against the euro followed remarks by Atlanta Federal Reserve president Jack Guynn yesterday that suggested the central bank won’t raise interest rates from a four-decade low anytime soon.

The economy may grow 4% this year and there was little sign of a “significant” increase in inflation that would lead to higher rates, Mr Guynn told the Rotary Club of Atlanta.

Belgian Finance Minister Didier Reynders said the euro’s rise “is not a problem.”

It may not be immediately, but IIB Bank chief economist Austin Hughes warned that if the downward dollar spiral continues US and Euro policymakers could be forced to take steps to prevent a fully-fledged dollar crisis.

Ulster Bank Financial Markets economist Niall Dunne believes the crisis being projected is slightly artificial. At this level against the euro, the dollar is still higher in value than at any time in the 1990s, said Mr Dunne.

In the light of that and given the desire of the US administration to boost the economy, the euro will make $1.35 before the year is out.

While theory suggests the dollar ought to be stronger as the prime driver of global economic growth, the US administration still favours a weaker dollar.

Political reasons have also been cited, but for whatever reason, the emerging consensus is for further dollar weakness.

Even from a European perspective, the weaker dollar is not a major issue because much of the trade is internal, economists said.

On that basis, Mr Hughes said the odds of the US and the European authorities acting together to stem the decline of the dollar are unlikely.

But statements from various members of the Federal Reserve Bank suggest they have given the green light for the dollar to continue to fall on money markets.

But Hughes warned if the slide gathers momentum and threatens a currency collapse “policymakers could be forced to alert their positions to stabilise currency markets.”

Meanwhile, barring such an outcome, Mr Hughes sees the euro ending the year at $1.25, not far off its current all-time high reached yesterday.