Thursday, February 15, 2007

Dollar How Low Will It Go?

The dollar continues to fall at a more than one month low agianst the yen Thursday, after U.S. government reports showed a mixed picture about the economy and the first net capital outflow for a year-and-a-half.

The yen received a boost after government data showed the Japanese economy expanded at a faster-than-expected pace in the fourth-quarter, sparking speculation the Bank of Japan will raise interest rates next week.

"We have better than expected data from Japan. Many are speculating that the BoJ is going to have to hike rates now," said Naomi Fink, senior currency strategist at BNP Paribas. "The U.S. data doesn't help, especially given" the capital flows report showing dwindling flows to fund the U.S. current account deficit, she said.
Chart of C_JPY

In New York trading, the euro stood at $1.3146, compared with $1.3127 late Wednesday, $1.3172, the highest level since Jan. 4. The dollar was quoted at 119.31 yen, compared with 120.71 yen. In intraday trading, it touched 119.29 yen, the lowest level since Jan. 10.

The British pound traded at $1.9544, compared with $1.9625. The dollar changed hands at 1.2333 Swiss francs, compared with 1.2349 francs.

The euro fetched 156.89 yen, compared with 158.55 yen. See live currency rates.

"The dollar is on the ropes as the outlook for both growth differentials and interest rate differentials continue to deteriorate," said Michael Woolfolk, senior currency strategist at The Bank of New York. "Look for the dollar for sustain more losses going into the three-day holiday weekend."

First outflow since 2005

Monthly capital flows reversed to an outflow of $11 billion in December compared to an inflow of $70.5 billion in November, the Treasury Department said. This was the first outflow since June 2005.

Net long-term capital inflows, meanwhile, fell to $15.6 billion in December from $84.9 billion in November. This is the lowest inflow since January 2002. The trade gap for the month stood at $61.2 billion. See full story.

"Today's TICS surprise moves global imbalance and U.S. twin deficit problem back on the front burner, with a red flag raised on adequate funding of the U.S. current account deficit," Woolfolk said.

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