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Asian Currencies Surge, Helped by G-7

The group's finance ministers urge greater flexibility in exchange rates. The dollar may fall further, analysts say.

April 25, 2006|From Bloomberg News and Reuters

Is the dollar headed for a new downward spiral?

The greenback tumbled against the Japanese yen and other Asian currencies Monday, driving down the region's stocks, after the Group of 7 nations urged emerging Asian countries to allow their currencies to strengthen.

The dollar slid to a three-month low of 114.36 yen from 116.67 on Friday. The U.S. currency also sank to an eight-year low of 939.50 South Korean won from 948.10 on Friday and to multiyear lows against the Singaporean dollar and Indonesian rupiah.

"Overall, it's bearish for the dollar out there," said Liz Bussanich, a senior vice president at Bank of Montreal in New York.

Traders dumped the U.S. currency after finance ministers and central bankers from the G-7 industrialized nations, meeting last week in Washington, said it's "critical" that Asian currencies -- particularly China's yuan -- should rise in value to ease the region's reliance on exports for growth.

"This is a much more forthright statement than we've seen previously from the G-7," said Naomi Fink, currency strategist with BNP Paribas in New York.

Asian governments have been under pressure by U.S. and European officials who say Asian currencies have been kept undervalued to maintain an export advantage. If the currencies were allowed to rise, so too could prices of many Asian exports.

China has been allowing its currency to rise in value against the dollar since July, but at a slow and controlled pace. The dollar was worth 8.02 yuan on Monday, compared with 8.11 at the end of July.

Against the yen, the dollar had been in a prolonged slide from early in 2002 to the end of 2004, falling from 135 yen to 102 in that period. But the U.S. currency rebounded last year, reaching 121 yen in December.

The renewed slide against Asian currencies comes as the dollar also is weakening against the euro. The European common currency hit a seven-month high of $1.241 on Monday, up from $1.233 on Friday.

With the U.S. Federal Reserve widely expected to soon halt its credit-tightening campaign, the dollar could weaken further, some analysts say. That's because rising U.S. interest rates have helped support the dollar by making U.S. fixed-income securities more attractive than those of many other nations.

A sliding dollar could help U.S. exporters by making American goods cheaper abroad.

On the flip side, Asian exporters could be hurt if their goods become more expensive for U.S. buyers. That concern hammered Japanese stocks Monday. The Nikkei 225-share index sank nearly 490 points, or 2.8%, to 16,914.40.

South Korea's main stock index tumbled 1.4% after reaching a record high Friday. Singapore's main index, which also hit a record high Friday, fell 0.4% on Monday.

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