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Dollar Falls Sharply as Goldman Chief Replaces Snow
MarketWatch.com, May 30, 2006
New York (MarketWatch) - The dollar was sharply lower against other major currencies Tuesday, hitting a two-week low versus the euro, after news that Goldman Sachs chief Henry Paulson will become the next Treasury secretary, replacing John Snow.
The greenback accelerated its decline after data showed U.S. consumer confidence slipped in May after hitting almost an four-year high in April. Earlier, in a brief speech at the White House, President Bush said Paulson would be his top economic adviser and the public face of the White House's economic policies.
Brian Dolan, director of research at Gain Capital, said the news should be a short-term positive for the dollar as Paulson, a Wall Street veteran, is more likely to support a stronger dollar.
"However, the major issue facing Paulson is the orderly resolution of global imbalances, with a weaker dollar against Asian currencies acting as one of the key levers.
"To the extent that Paulson has greater credibility with financial markets, the dollar is likely to experience renewed weakness against Asia as Paulson's new Treasury team more effectively presses the case for Asian currencies to strengthen and is less tolerant of Asian central bank/finance ministry efforts to slow currency adjustments," he said.
In New York trading, the euro rose to $1.2892 from $1.2748 late Monday, after earlier touching $1.2908, the highest level since May 17. The dollar fell to 111.81 yen from 112.52 yen. The British pound was fetching $1.8844, up from $1.8601. The dollar changed hands at 1.2081 Swiss francs versus 1.225 francs.
The dollar had heavily sold off earlier in the session on concern that Donald Evans, the former Commerce secretary, would get the nod to replace Snow at Treasury. But it recovered some losses after Paulson, instead, was named.
The currency move may be tied to Paulson's background in the financial-services industry, rather than Evans' history as a Texas oil businessman, as Treasury secretaries with financial backgrounds tend to argue more vehemently for the need for a strong dollar.
Robert Rubin, President Clinton's Treasury secretary, also was a Goldman Sachs executive and was seen as a proponent of a strong dollar.
"I think that Paulson would be a good candidate. He's pro business and may push to relax some of the protectionist measures that the Bush administration is negotiating. In addition, he may stop paying lip services to a faux strong dollar policy," said Kathy Lien, chief strategist at FXCM.
Consumer confidence slips
The consumer confidence index fell to 103.2 in May from a revised 109.8 in April, the Conference Board said Tuesday. This is the lowest level since February.
The decline was not as sharp as expected. Economists had forecast the index to fall to 100.7, according to a survey conducted by MarketWatch.
Consumers were less optimistic about the future. The expectations index slipped to 83.7 in May from 92.3 in the previous month. It is now at its lowest level since October.
"The index remains above its pre-Iraq war and post-Katrina lows, but is now consistent with real consumers' spending slowing to a year-over-year pace below 2%," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. "The Fed ought to be more concerned with the clear signs of slowing spending."
Market participants are awaiting the release of the latest Federal Open Market Committee meeting minutes on Wednesday for clues about the Fed's likely monetary policy move at the June 28-29 meeting. The Federal Reserve has increased interest rates at 16 consecutive meetings since June 2004, pushing the federal funds rate to 5%.
The dollar has been under pressure in 2006. With expectations that the Federal Reserve's rate-tightening campaign is coming to a close, attention has been drawn back to the U.S.' twin deficits.
The dollar has lost about 4.9% versus the yen and 6.3% versus the euro this year.
Eurozone M3 accelerates
In European trading, the euro was supported by data that showed eurozone monetary supply accelerated to 8.8% on a year-over-year basis in April from a revised 8.5% in March. Economists had been expecting a reading of 8.5%.
"That is the fastest pace recorded in nearly three years," said currency strategists at Brown Brothers Harriman, in a note. "We expect a 25 basis points hike in June but we don't expect the ECB to wait until the fall to hike a second time; we expect a second 25 basis point hike in the summer."
Also on Tuesday, Klaus Liebscher, a member of the European Central Bank's governing council, reiterated that the central bank must show "strong vigilance."
"Some in the market have been leaning toward a 50 basis points June hike given both the data and ECB chatter," BBH's analysts said.
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