U.S. dollar starts the big slide against major currencies

[Al-khiyal]

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."

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.

A lack of supply and strong demand has pumped up commodity prices. 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.

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.

Weak US dollar weighs on markets

[Theja]

The US dollar reached a low of 1.36 Euro (helping Warren Buffet earn $1.3 billions on the currency market), and reversed to as low as 1.16 (letting Buffet giving back nearly one billion).

Now that it has reached 1.28, talks are beginning to surface that its about time the Dollar strengthen a bit again --- hence it came back to 1.27 as of today.

[sania]

Stock market pundits say that a strong US $ attracts money flow to the US,
and lowers the stock values in other countries due to sell-offs.

But this article says the opposite..!

How to reconcile these two contradictory aspects ?

Can any economics expert explain..?

[Al-khiyal]

Stocks plunged Wednesday after a stronger-than-expected rise in consumer prices intensified Wall Street's fear that interest rates will keep climbing. The Dow Jones industrial average lost 200 points, and the Nasdaq composite index turned negative for the year.

Investors were disappointed by a Labor Department report that its consumer price index swelled 0.6 percent in April, topping forecasts of 0.5 percent. But core CPI _ without food and energy _ also gained 0.3 percent, ahead of economists' prediction and adding to worries that soaring oil prices have begun to lift prices elsewhere.

The inflation data dragged bonds lower and overshadowed solid earnings from Hewlett-Packard Co. and cooling oil prices. Wall Street has been anxious about economic news after the Federal Reserve last week said more rate hikes could be needed to battle inflationary pressures from record commodities prices.

"The CPI data really kicked the market in the teeth today," said Ken Tower, chief market strategist for Schwab's CyberTrader. "So the question now really is where can we find some support?"

With the Dow coming within 75 points of its all-time high of 11,722.98 last week, many analysts felt the market was overbought and would soon see a correction. But Tower said stocks are now oversold after several days of steep losses, suggesting that investors may start looking for positive signs to spur buying.

In midafternoon trading, the Dow sank 200.03, or 1.75 percent, to 11,219.86, a one-month low. The Dow was poised to log its biggest single-day drop since falling 213 points on Jan. 20.

Broader stock indicators declined. The Standard & Poor's 500 index was down 18.26, or 1.41 percent, at 1,273.82; the Nasdaq fell 25.93, or 1.16 percent, to 2,203.20, showing a loss for the first time in 2006.

The prospect of higher interest rates hurt bonds, with the yield on the 10-year Treasury note surging to 5.17 percent from 5.1 percent late Tuesday. Last Friday, bond yields reached a four-year high of 5.19 percent.

While Wednesday's retreat reflected Wall Street's ongoing nervousness about interest rates, investors may have gotten ahead of themselves before last week's Fed meeting. Many traders were betting that the central bank would pause its two-year streak of rate hikes, and catapulted the major indexes to fresh multiyear highs.

The Fed boosted rates to 5 percent and left flexibility to pause its rate tightening. However, the Fed cautioned that soaring oil and gold prices threaten to drive inflation and could warrant higher interest rates to stifle demand and keep prices from escalating. The CPI report and Tuesday's producer price index reading reinforced that warning.

Gregory Miller, SunTrust Banks' chief economist, said the market was still largely split on whether the Fed will increase the key short-term lending rate by another quarter percentage point when policymakers meet on June 29.

"But it won't surprise me if this is when they decide to start the pause and allow data to accumulate," Miller said. Looking at data from the first half of the year, "I suspect what they'll find is energy prices will stop trending higher, and the slower growth numbers will accumulate."

The U.S. dollar continued losing ground to the Japanese yen and also weighed on the market's mood, CyberTrader's Tower said. The dollar's retreat could propel inflation since more of the U.S. currency will be needed to purchase foreign-made goods.

"The dollar has depreciated quite sharply since the Fed started talking about stopping its rate hikes," Tower said. "It's not so much that the dollar is depreciating _ it's the speed of the depreciation that is worrying the currency market. The dollar is down 6 percent in one month, which is a lot....."

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[Al-khiyal]

Dollar falls on speculation central banks are reducing holdings

[Theja]

The dollar strenthened about a 100 pips today (5-17-06). I was too chicken and made only $100, instead of $1000. Oh well something is better than nothing.

[Al-khiyal]

Be careful not to play with fire, ya Theja,

Things seem a little volatile at this time and the likelihood is that they will get worse, with regard to dollar value, before they get better, sa7?