The dollar could slide still further, in spite of hitting an all-time low against the euro last week in the wake of George W. Bush’s re-election, currency traders have said.
The dollar sell-off has resumed amid fears among traders that Mr Bush’s victory will bring four more years of widening US budget and current account deficits, heightened geopolitical risks and a policy of “benign neglect” of the dollar.
Many currency traders were taken aback on Friday when the greenback fell in spite of bullish data showing the US economy created 337,000 jobs in October.
“If this can’t cause the dollar to strengthen you have to tell me what will. This is a big green light to sell the dollar,” said David Bloom, currency analyst at HSBC, as the greenback fell to a nine-year low in trade-weighted terms.
The dollar’s fall comes as the Federal Reserve is widely expected to raise US interest rates by a quarter point to 2 per cent when it meets on Wednesday and to signal that it will continue with a measured pace of rate increases.
Speculative traders in Chicago last week racked up the highest number of long-euro, short-dollar contracts on record. Options traders have reported brisk business in euro calls – contracts to buy the euro at a pre-determined rate.
However, the market has been rife with rumours that the latest wave of selling has been led by foreign governments seeking to cut their exposure to US assets.
India and Russia have reportedly been selling US assets, as well as petrodollar-rich Middle Eastern investors.
China, which has $515bn of reserves, was also said to be selling dollars and buying Asian currencies in readiness to switch the renminbi’s dollar peg to a basket arrangement, something Chinese officials have increasingly hinted at. Any re-allocation could push the dollar sharply lower and Treasury yields markedly higher.