Dollar may get a short term pop, but long run weakness likely to continue.
December 14, 2003: 5:16 PM EST
NEW YORK, Dec 14 (Reuters) - While the U.S. dollar is seen getting a short term boost from the capture of Saddam Hussein on Saturday, analysts still see dollar weakness in the months ahead, and say coordinated intervention by the U.S., Europe and Japan to slow the dollar's fall is unlikely.
Significantly, the United States administration still sees no need for intervention to slow the dollar's two-year slide.
U.S. Treasury Secretary Snow said on Friday that the dollar's decline in the past couple of years had been "orderly", implying intervention to slow the fall was unnecessary.
Snow's comments helped to send the dollar to a new low against the euro late Friday around $1.2306.
Similarly, asked on Friday to comment on Snow's remarks and on the need for intervention, U.S. President Bush said, "My answer to that question about the dollar is that this government is for a strong dollar, and that the dollar's value ought to be set by the market, and by the conditions inherent in our respective economies, and our economy is very strong and is getting stronger," he said.
While the Bank of Japan has intervened repeatedly this year to slow the dollar's decline against the yen, the chances of concerted action to put a floor under the dollar remain slim, given the lack of political consensus among the governments of Europe, Japan and the US, analysts said.
"It would be a low probability bet," said Carl Weinberg, chief economist with High Frequency Economics in Valhalla, New York.
"It takes extraordinary circumstances to incubate a currency deal and most importantly all nations have to have a common interest ... I just don't see that right now," Weinberg added.
In the past two years the dollar has dropped more than 30 percent against the euro and has shed more than 15 percent against the yen.
But the current scenario is a far cry from the dollar's decline in the 1980s, when the dollar fell by some 40 percent on a trade-weighted basis in less than two years following the September 1985 Plaza Accord, said Marcel Kasumovich, head of G10 foreign exchange strategy with Merrill Lynch in New York.
In 1985 the then U.S. Treasury Secretary James Baker persuaded some U.S. trading partners to agree to engineer a weaker dollar because their economies were growing enough to tolerate a firming of their respective currencies.
Indeed, so effective was the Plaza Accord in sending the dollar down that major industrial countries had to reverse course and strike the Louvre Accord of February 1987 in an effort to brake the greenback's descent.
That was then, this is now
"The distribution of global growth now is quite different. Japan and Germany (then) had relatively firm momentum and domestic demand," said Kasumovich.
While the U.S. economy saw more than 8.0 percent economic growth on an annualized basis in the third quarter this year, job growth has barely begun to revive after the 2001 recession.
As a result, the United States administration is believed to want a weaker dollar in order to help exporters and woo voters in key U.S. manufacturing states in the run up to the 2004 presidential elections.
By contrast, some European governments would prefer a stronger dollar, as the soaring euro threatens to undermine the competitiveness of their exporters.
Similarly, Japan is also worried that the resurgence of the yen will threaten its own recent economic recovery, leading the Bank of Japan to intervene by selling the yen against the dollar as it has done repeatedly in recent months.
Even if a political consensus in favor of halting the dollar's decline were to emerge, economic fundamentals continue to suggest the dollar has further to fall, analysts say.
The U.S. current account deficit, the broadest measure of the nation's global trade gap, has reached 5 percent of gross domestic product, compared with around 3 percent in mid- 1980s, suggesting the dollar needs a larger fall to offset the imbalance that occurred after 1985, said Kasumovich.
The Federal Reserve last week also left U.S. interest rates unchanged at their lowest level in 40 years, providing little incentive for overseas investment in the U.S., analysts noted.
Coordinated G7 intervention was only likely if the dollar's decline were to provoke a simultaneous and dramatic fall in stock and bonds markets, analysts said.
"The ultimate question is if the dollar goes into freefall, does that create a global problem, and do U.S. European and Japanese authorities stand up and say enough is enough," said Jeremy Fand, senior proprietary trader with WestLB in New York.
Right now, U.S. policy makers show "no sense of any concern about the level of the dollar. The chance of a G7 type accord is very remote," Fand said.
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