Dollar hits fresh three-year lows

news.ft.com By Christopher Swann Published: January 10 2003 18:56 | Last Updated: January 10 2003 18:56

Gloomy employment figures cast a further shadow over the US dollar on Friday, sending it to a fresh three-year low against the euro.

Worries have been mounting in recent months that the US economic recovery is failing to generate jobs. This was underlined Friday by non-farm payrolls, which fell 101,000 in December.

Analysts are still forecasting US economic growth of around 2.7 per cent this year. But this would come under threat if the fear of unemployment starts to undermine consumer spending.

Many now believe that the dollar is in a no-win situation.

Even if, as expected, the US outpaces the eurozone and Japan by a significant margin, analysts expect the current account to drag on the currency. Growth is expected to be based on consumption and government spending, which tend to suck in imports, rather than on business investment, which tends to attract foreign capital.

On Friday the euro hit $1.055. Tony Norfield, head of currency strategy at ABN Amro, said the dollar was now reaching technically sensitive levels. "If the euro manages to close above $1.055 or $1.06, then the upswing looks likely to continue," he said. Mr Norfield added that positions by real money investors were still relatively modest. Many were likely to be tempted to hedge their portfolios against the threat of further dollar weakness.

"Low US interest rates has meant that it is now cheaper to hedge dollar exposure than at any time since 1993-94," said Mr Norfield.

The antipodean currencies also rose strongly. "The Australian and New Zealand dollars are being helped by their high yields and their perceived remoteness from geopolitical tensions," said Tim Fox, market strategist at National Australia Bank. It had looked like the Venezuelan bolivar was only going one way.

Last year the currency fell 46 per cent against the dollar. With the oil strike entering its second month, 2003 looked set for more of the same.

But suggestions that the US may be poised to mediate has helped push the dollar back from 1,621 bolivars to 1,471 bolivars.

There has also been a realisation, said Marc Chandler, chief currency strategist at HSBC in New York, that the financial vulnerability of the country has been overstated.

"Venezuela has about $14bn in hard currency reserves, about four times its sovereign debt servicing obligations this year," he said. He added that the US had a powerful motive for bringing the strike to an end, since the curtailment of oil exports from Venezuela had added upward pressure on gasoline prices and inventories are falling.