Dollar slides after US data

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The dollar traded down to a two-month low against the euro on Friday as the market reacted to news that the US current account defecit for January was wider than expected. The possibility of global central banks diversifying their currency reserves away from the greenback also continued to weigh on the US currency.

The euro hit a high of $1.3481 against the dollar shortly after the announcement that the US trade balance for January was $58.27bn, outstripping consensus forecasts of $56.5bn.

The dollar has lost more than two per cent of its value against the euro in the last week, and commentators believe the trade figures will do nothing to relieve the pressure. “The release of the worse than expected trade deficit has been naturally negative for the dollar. However, given our view that next week’s US Treasury’s TICS report is likely to reveal a fall in January net portfolio inflows to just $51bn, we think downward pressure on the dollar is likely to be maintained going into next week,” said Kristjan Kasikov, currency strategist at Calyon.

Adding to concerns over the US current account defecit has been speculation that Japan may diversify its holdings of foreign currency reserves, raising fears over how the US would fund the shorfall. However, the Japanese Ministry of Finance has been keen to play down the significance of prime minsiter Koizumi’s remarks on central bank reserves on Thursday, denying that he had advocated currency diversification.

“Even a modest rebalancing of currency reserves might well cause the dollar to plunge against the yen to levels that would undermine the competitiveness of Japanese exporters,” said Paul Chertkow at the Bank of Tokyo-Mitsubishi. “Should the speculation against the dollar relative to the yen intensify, we believe that the Japanese Ministry of Finance would instigate renewed intervention by the Bank of Japan to prevent a test of Y100.”

The dollar fell to Y103.74 against the yen following the trade figures from Y104.16.

Sterling hit an eight week low against the euro and lost ground against the dollar, as the market began to lose interest in the relatively high interest rates that had been supporting the pound.

Sterling fell a quarter per cent to £0.6996 per euro, its lowest level since January 18, before pulling back to £0.6973.

Against the dollar, sterling fell to a low of $1.9165 before recovering to $1.9190, down from Thursday’s close of $1.9236. Speculation over sharp rises in US interest rates has seen the pound retreat from its highest level of the year against the dollar, set at $1.9325 on Tuesday.

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