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US dollar poised to depreciate

19 March 2009 12:36 (UTC +04:00)

According to a Commerce Department report, the U.S. current account for the fourth quarter narrowed sharply and by more than expected to $132.8 billion, the smallest since the fourth quarter of 2003, as U.S. imports plunged more than exports.

The fourth quarter deficit equaled 3.7 percent of gross domestic product, down from 5.0 percent in third quarter and the lowest since 3.4 percent in fourth quarter 2001.

All major categories of exports and imports declined substantially, with a sharp drop in the price of oil playing a big factor in the decline on both sides.

The current account is the broadest measure of U.S. trade because it tracks not only the flow of goods and services across borders but also investment flows. The deficit is equivalent to a debt owed by the U.S. to the rest of the world.

The U.S. dollar appreciated 11 percent in the fourth quarter on a trade-weighted quarterly average basis against a group of seven major currencies.

Fed policy makers said yesterday they plan to buy as much as $300 billion of U.S. government bonds and step up purchases of mortgage bonds, expanding the central bankâ€™s balance sheet by as much as $1.15 trillion. The extra supply of dollars threatens to overwhelm investors just as the budget deficit swells.

The Fed move stirred worries that the U.S. would spew dollars into global markets, leading to an oversupply of the world’s main reserve currency.

The move to expand the Fed’s balance sheet is also sparking doubts about the dollar’s status as the world’s reserve currency, and concerns that it will be followed by similar moves from other central banks, creating a domino effect of weakening currencies.
Central banks in Britain and Japan have already announced they would purchase their respective government debt, while the Swiss National Bank last week said outright it would sell francs to weaken its currency.
In addition, the European Central Bank may also eventually turn to non-standard policy measures after cutting interest rates to a record low 1.5 percent in March.
The euro initially extended its gains on Thursday after jumping 3.8 percent on Wednesday for its biggest one-day rise since its launch in 1999, according to Reuters data.

The euro hit a two-month high of $1.3536 on trading platform EBS, but it later trimmed its gains and was down 0.1 percent from late U.S. trading on Wednesday at $1.3462.
In the near-term, the euro may have more room to rise against the dollar, market players said.
The euro will probably rise to $1.3590 in two weeks provided it holds above $1.3330 through March 20 and could head toward $1.4000, helped by its yield advantage over the dollar.
In Azerbaijan, the official exchange rate of the US dollar dropped to a two-month low at 0.8026 manats on March 19 after the global market trends coincided with the central bankâ€™s large-scale intervention to prevent the national currency devaluation during about ten non-business days due to Novruz Holiday.
At the same time, the euro strengthened by 3.15% against the manat in the country.