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Monday, January 05, 2004

Euro: Plus Ca Change

Hi, I'm Back: on the tools as it were. 2004 Bonobo blogging begins here (although, as I'll be explaining later, it almost certainly won't be ending up here). So Happy New Year everyone, and what better way to ring out the old, and bring in the new than a timely post about the Euro.

Of course it continues to go up, and to defy what you might have thought was all economic logic. The problem is a fault, not in the Earth's crust, but in the underlying financial structure. So, at least in the short term, and come what may, the Euro is condemned to rise. What a pity Ben Bernanke isn't a European. He seems to understand what is going on, much to the surprise of the FT journalist covering the story. He is happy with the situation. Now why would this be? Because letting the dollar slide slowly down solves two problems 'a la vez': it does something to counteract the terrible trade deficit problem the US has, and it gives some extra insurance against deflation (which is after all Bernake's number one worry). Meantime what is the consequence of all this for the German economy? Methinks we are about to find out. Like I said: pity Bernanke wasn't born a European.

There was no respite for the dollar at the beginning of the new year as it registered another lifetime low against the euro in Asia as Japanese investors returned to push the greenback lower.

Comments from Ben Bernanke, US Federal Reserve governor, did little to support the struggling US currency which slid to a fresh lifetime low against the euro and the lowest levels for a month against the yen.

The dollar fell to $1.2672 in Asian trade, down from $1.2585/89 in late US trade on Friday. In early European trade the dollar was staving off fresh lows at $1.2646. The US currency has fallen close to 5 per cent against the euro in the last month as dealers worry about the size of the US current account defecit.

Against the yen the dollar fell to four-week low of Y106.76 at which point the Bank of Japan intervened to halt the dollar's decline, although the BoJ provided no official confirmation of the move. In early European trade the dollar was back above the Y107 level at Y107.02.

The euro hit a 5-month high of Y135.75 against the yen in Asian trade before falling back to Y135.24 in early European trade.

On Sunday, Ben Bernanke, governor of the Federal Reserve, seemed to indicate that policy makers were relaxed about the speed of the dollar's declines. Speaking in San Diego the governor said the risk of a dollar crisis was quite quite low and that the Federal Reserve was correct to hold interest rates in the US at their historic lows of 1 per cent.

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