Tuesday, May 16, 2006

Weak US dollar weighs on markets

Weak US dollar weighs on markets

Weakness in the US dollar has continued to overshadow global stock markets as investors offloaded exporters on fears that corporate earnings will decline.

Commodity markets have also slumped, with traders beginning to ask if recent record prices were justified.

London's main FTSE 100 index shed 1.2% to 5,841, led by the mining firms that have been the year's best performers.

Germany's Dax ended down 1%, France's Cac slid 1.7%, Tokyo's Nikkei 225 fell 0.7%, and India's Sensex slumped 3.8%.

In New York the Dow Jones was down for most of the day before finally ending up 0.42%.

The Nasdaq lost 0.23% to close at 2,239.

One stockbroker in Germany explained that: "Investors are extremely nervous and the sell-off is hectic as people are trying to minimise their losses."

Banking giant HBOS added that: "Risky assets are under significant pressure across the board."

Profits squeeze

A report in Monday's Wall Street Journal claimed that President George W Bush's administration is "quietly acquiescing" to a dollar drop because it wants a weaker currency to boost foreign sales of US-made goods.

Analysts said that US policymakers are signalling they are happy for the dollar to decline by not aggressively talking up the currency.

A falling dollar would benefit the US economy by making US exports cheaper, and could help reverse the $700bn (£372bn) trade deficit with the rest of the world.

However, the dollar's fall could also increase the cost of US imports, thus fanning inflation and forcing the Federal Reserve, the US central bank, to continue to increase interest rates.

While that may be good news for the US trade deficit and domestic firms, it is likely to crimp sales growth at large foreign exporters such as electronics firms Sony and Canon, and carmaker Volkswagen.

During Asian trading on Monday, the dollar fell to an eight-month low of 109.66 yen. However, it recovered when European trading started and was recently at 110.35.

The dollar also perked up against the euro and recovered to $1.2787 against the single European currency. It had earlier touched one-year lows.

The greenback also recovered against pound sterling, with one pound worth $1.8845, compared with $1.8895 earlier.

Trade movement

At the same time, China's currency settled below the key 8-yuan level against the dollar for the first time since it was revalued last year.

By setting the yuan's level at 7.9982 versus the US dollar on Monday, China signalled that it was willing to allow its currency to appreciate further against the US dollar, analysts said.

The strength of the dollar against the yuan has been a key issue facing the White House, especially as Chinese exports to the US have surged.

Earlier this month, the US Treasury criticised China for making "too little progress" in reforming its exchange rate, but stopped short of accusing Beijing of manipulating its currency. That would have paved the way for sanctions.

America's deficit with China grew to $15.6bn in March.

Story from BBC NEWS: