Global currency markets shrugged off positive news about U.S. job growth yesterday and drove the dollar to a record low against the euro, bolstering predictions that the U.S. currency will continue to weaken amid large budget and trade deficits.
The dollar was trading late yesterday at a rate of $1.2962 per euro. The previous high for the shared European currency was $1.2930 per euro, which was reached in February. Against the Japanese yen, the dollar slid to 105.5 yen, from 106.03 yesterday; against the Canadian dollar, the U.S. currency fell to a new 12-year low, and against the Swiss franc, it dropped to the lowest level in eight years.
One factor pushing the dollar down was the growing perception that European officials won't intervene to stop the euro's ascent even though a stronger euro makes the continent's goods less competitive. German Chancellor Gerhard Schroeder said yesterday that the euro's rise is "not yet dramatic," and on Thursday, Jean-Claude Trichet, president of the European Central Bank, made noncommittal remarks about the currency's move, which has some benefits for Europe by helping to contain the cost of imported oil.
Yesterday's action in foreign exchange markets was especially noteworthy because it came despite a U.S. government report that would normally send the dollar soaring -- the much higher than expected rise in non-farm payrolls for October.
The U.S. currency rallied briefly in the morning following the release of the Labor Department data, because strong growth in a country's economy is generally bullish for its currency. But soon thereafter, the dollar resumed a decline that has been accelerating since early October.
Many analysts saw that development as evidence that the dollar is headed lower, possibly sharply so, because of longer-term factors, in particular the budget and trade deficits. The United States has been borrowing heavily from foreigners to cover both gaps -- the first between government spending and government revenue, the second between imports and exports. As U.S. indebtedness to foreigners has soared, so have forecasts that overseas investors might become concerned about America's ability to repay what it owes and unload their holdings of U.S. Treasury bonds and other securities.
"The cyclical news about the economy has been good all week -- oil prices are down, and the reelection of President Bush was viewed as a risk-reducing event, all of which was supposed to be good for the dollar," said Daniel Katzive, a foreign exchange strategist at UBS in Stamford, Conn. "Yet the dollar has continued to move down. That gives people confidence that this is a move driven by structural factors . . . that it's the twin deficits."
Although the markets have been aware of the deficits for a long while, Katzive noted that the trade deficit in particular has worsened in recent months, to the surprise of many forecasters.
Some currency market players were citing the U.S. deficits. "On the fiscal front, arguably the most important longer-term dollar issue, a clear Bush win was likely the worst outcome" for the dollar, said a report issued yesterday by James McCormick, the London-based head of currency strategy for Lehman Brothers. "The administration's first term oversaw the largest fiscal deterioration since World War II. . . . The dollar-negative policies that have been in place for most of the past four years remain."
A lower dollar is by no means all negative for the U.S. economy -- in many respects it is a big plus. It makes U.S. goods cheaper relative to products made abroad, enhancing the competitiveness of American firms. Over the long run, however, a cheaper dollar could erode U.S. living standards by increasing the cost of imported goods.
The greater worry is that a steady tumble in the dollar prompting foreign investors to dump massive quantities of U.S. stocks and bonds could lead to a financial crisis and ultimately to recession. Among those sounding alarms recently are Lawrence H. Summers, the former U.S. Treasury secretary who is president of Harvard University, and Kenneth S. Rogoff, a Harvard professor and former chief economist of the International Monetary Fund. The pessimists do not claim to know when, if ever, the markets might lose faith in the dollar.
Bush administration officials have dismissed such scenarios, arguing that the demand from abroad for U.S. investments is virtually bottomless.