Ib Hl Economics Exchange Rates Commentary

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COMMENTARY COVERSHEET

Economics commentary number ________4______HL Number ________________

Title of extract: WORLD FOREX: Dollar Support Sinks, Hits 12-Month Euro Low

Source of Extract: The Wall Street Journal

Date of Extract: September 16, 2009

Word Count: 750 words

Date the commentary was written: November 17, 2008

Sections of the syllabus to which the commentary relates: International Economics

Candidate Name: Malik Medjahed - Schwethelm

Candidate Number___________________________________

WORLD FOREX: Dollar Support Sinks, Hits 12-Month Euro Low

By Bradley Davis
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--The dollar continued its slide Wednesday, touching its lowest level in 12 months against the euro and flagging against the yen as rising equities battered the greenback yet again.

The dollar has lost key legs of support over the past two weeks as encouraging global economic data has led investors to assume more risk and buy higher-yielding assets. With the recession receding and financial markets in recovery, investors have become more confident there's no longer a need to hold their money in a safe-harbor currency like the dollar.

Because of the Federal Reserve's need to stimulate the economy, the dollar's ultra-low interest rates have made it the lowest-yielding major currency. The cost of borrowing U.S. dollars in the London interbank market continued its slide Wednesday. The key three-month London interbank offered rate marked its lowest level since the British Bankers' Association first introduced its Libor fixings in 1986.

The dollar hit its lowest level against the common currency since September 2008 in New York afternoon trading, with the euro touching a 12-month high at $1.4738. If the euro is able to sustain levels above $1.4720, a key technical level, it could be on a march to $1.50, said Carl Forcheski, vice president for foreign exchange at Societe Generale in New York.

The dollar's losses were broad, sinking to new 13-month lows against the Australian and New Zealand dollars as well as lows for 2009 versus other widely traded counterparts. The U.K. pound also piggy-backed off the euro's gains to advance on the dollar.

The yen had been the so-called "carry trade" currency of choice, but with U.S. interest rates expected to remain feeble until 2010, analysts anticipate the dollar to continue funding riskier bets. A carry trade involves buying a lower-yielding currency to fund purchases of higher-yielding assets.

The dollar was also burdened Wednesday by comments from Japan's incoming finance minister, Hirohisa Fujii, who said he saw no need to intervene in currency markets to weaken the yen. In the past, the dollar had received support from the belief that Japan would intervene to prevent unwanted appreciation of its currency. "There's no change in my thinking" that it's not the time to consider foreign-exchange intervention, Fujii said at a news conference.

Though he wouldn't rule out intervention in what he termed "really abnormal situations," Fujii said "the idea that the yen should be cheaper for the sake of [Japan's] exporters is wrong." Wednesday afternoon in New York, the euro was at $1.4729 from $1.4667 late Tuesday, according to EBS via CQG. The dollar was at Y90.78 from Y91.06. The euro was at Y133.72 from Y133.60. The U.K. pound was at $1.6506 from $1.6495, while the dollar was at CHF1.0306 from CHF1.0340.

U.S. economic data released Wednesday, including as-expected August consumer price index and better-than-expected industrial production numbers, pointed to a continuing recovery, leading stocks to rally. The Dow Jones Industrial Average rose 108 points, lending support to the euro and other high-yielders.

The dollar looks likely to continue its broad-based slide through the rest of the year, analysts said. As long as the buck doesn't fall too far too fast, dollar weakness is expected in a time of...
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