Friday, October 27, 2000

Euro drags dollar into its black hole

By TONI O'LOUGHLIN

Concerns over further declines of the euro against the US dollar kept the Australian dollar under pressure yesterday, after being pushed to new all-time lows in overnight trading Wednesday.

In local trading yesterday, the dollar touched an intra-day low of US51.66c, after dropping to a record US51.52c low overnight.

The dollar fell in tandem with the euro, which hit a new low of US82.40c as traders abandoned hope that the European Central Bank or any of the Group of 20 industrialised nation members would intervene on its behalf.

ABN Amro treasury strategist Mr Peter Clay said the dollar's renewed weakness was due to "an unwinding of the premature bullishness that we saw last week".

"We started to hear people speculate that the low was in place." It was likely that the dollar would continue languishing at these levels, he said. "We are now in a bear market for US equities, and that may well be the undoing of the whole soft landing story.

"The engine for global growth over the past few years has been the US economy and if you take that away you may all of a sudden reverse the global growth outlook," Mr Clay said. As a result, the dollar would continue to suffer.

Sentiment in local foreign exchange markets was dominated by concerns over further falls due to the weak euro, with the much stronger than anticipated average weekly earnings data failing to have any effect.

Financial markets were jolted from their certainty yesterday that interest rates were on hold after Bureau of Statistics figures showed wage rises between May and August were twice as big as expected. Markets expected the average weekly earnings survey to show pay rates up by 0.8 per cent but instead it revealed salaries had soared 1.7 per cent.

The surge pushed the annual rate to 5.9 per cent, well beyond the Reserve Bank's comfort zone of between 4 and 5 per cent.

The shock wages data undermined confidence that inflation was under control, despite GST-inspired price hikes, and caution over the poor quality of the data.

Deutsche Bank currency strategist Mr Richard Yetsenga said: "Let's not forget that we have still got the effect of the oil prices, a weak currency, the inflationary impact of the GST and that we still have a labour market that is showing signs of tightening."

The risk was that the Reserve Bank would tighten again either later this year or early next year, Mr Yetsenga said. "The short end of the yield curve doesn't have enough priced in for the inflation risks out there," he said, and market interest rates, or bond yields, could move higher.

Despite the expectation that bond yields would continue to rise, along with the inflationary risks, analysts said they were holding firm to their forecasts that rates were on hold, for now.

Salomon Smith Barney Citibank bonds and currency strategist Mr Stephen Halmarick said the average weekly wages figures were not "a very reliable source of information".

"We think there's no more changes for an extended period until well into next year because the inflation outlook is obviously pretty good and the economy will probably slow a little over the next six months.

"Domestic spending is expected to be weaker although that will be offset to some extent by stronger exports," he said.

http://www.smh.com.au/news/0010/27/business/business4.html

-- Martin Thompson (mthom1927@aol.com), October 26, 2000