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Markets

Dollar Tumbles to New Multiyear Lows

May 07, 2003|From Bloomberg News and Times Staff Reports

Treasury Secretary John W. Snow on Tuesday reiterated the Bush administration's support for a strong dollar. But were any currency traders listening?

The dollar tumbled to fresh multiyear lows against key rivals after the Federal Reserve signaled its readiness to cut U.S. interest rates that already are at their lowest in four decades.

The dollar slid to its weakest level against the euro since January 1999, the month the European currency began trading. At $1.142, up from $1.128 Monday, the euro was nearing the $1.17 at which it was first valued.

It was worth $1.04 at the start of this year.

The Canadian dollar climbed to a five-year high of 71.7 U.S. cents from 70.9 cents Monday. The U.S. dollar also fell sharply against the Swiss franc, the British pound and the Australian dollar, among other currencies.

Currency values typically reflect investors' faith in the strength of the economy behind the currency. The Fed, by holding out the prospect of lower interest rates, confirmed the downbeat views many foreigners have of the U.S. economy.

"The international investment community, including central banks and investors, just doesn't see the U.S. economy back on solid footing," said Charles Spence, director of currency sales at ING Financial Markets.

What's more, by maintaining interest rates that are lower than in Europe, Canada and other developed economies, the Fed is causing foreign investors to shun U.S. fixed-income securities for other nations', analysts said.

Treasury's Snow, speaking on CNBC, said the U.S. is pursuing growth policies -- such as President Bush's tax-cut proposal -- to boost the appeal of the dollar.

"We favor a strong dollar and we think a strong dollar is in the national interest, and the way to have a strong dollar -- a dollar that's widely accepted and a good medium of exchange -- is to work on the fundamentals of the American economy," Snow said. "That's why we're pushing the jobs and [tax-cut] plan so hard."

The weak dollar is slashing Americans' purchasing power abroad. But it can help the economy by lowering the cost of U.S. exports for foreign buyers.

If the dollar's weakness snowballs, it could cause foreigners to pull out of U.S. assets rather than risk further devaluation of their holdings. That is already happening on some scale: Foreigners pulled a net $418 million out of U.S. stocks in the week ended May 2, according to UBS Warburg. That's the fourth week in five that outflows rose.

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