Dollar Falls Against European Rivals

By DAN MOLINSKI
WALL STREET JOURNAL
October 23, 2007 9:45 a.m.

The dollar is weaker against European currencies early Tuesday in New York as global stock markets rebound and investors re-focus their attention on expectations of Federal Reserve rate cuts next week.

The euro was at $1.4255, up from $1.4164 late Monday, while the dollar was at 114.96, up from 114.30 yen. The U.K. pound was at $2.0483, up from $2.0311. The dollar traded at 1.1726 Swiss francs, from 1.1772 francs.

The greenback is also suffering against Canada's dollar, which jumped to yet another 31-year high Tuesday amid an improved global outlook that suggests demand for Canada's commodity exports will remain robust.

The greenback's declines Tuesday are a reversal from Monday when the dollar gained broadly as stock markets declined from Tokyo to Japan, sparking risk aversion in currency markets that led to safe-haven buying of the greenback.

But equity markets performed well overnight Tuesday, and U.S. stocks are likely to open in positive territory, putting the dollar back on the defensive.

"The fundamental picture has not shifted. The dollar will remain on a weakening trend," said Marc Chandler, global head of foreign exchange at Brown Brothers Harriman.

That fundamental picture, Mr. Chandler said, is the market's view that the Fed is likely to cut rates at its Oct. 31 meeting, and perhaps at a December meeting as well, while the European Central Bank, which oversees the euro zone, is likely to remain hawkish on rates.

There is little data out Tuesday, so the dollar is likely to remain under pressure against its European rivals, assuming U.S. equities behave.

A report on regional manufacturing activity from the Richmond Fed is the data highlight Tuesday, and it comes out at 10 a.m. EDT. But analysts say it is unlikely to jar currencies.

Meanwhile, the rise in equities Tuesday and the accompanying return of risk appetite is pushing the yen lower across the board.

On Monday, when stocks were suffering, the yen was the big winner as investors fled the carry trade -- borrowing low-yielding currencies such as the yen to invest in higher-yielding assets denominated in other currencies such as the euro or the Australian dollar.

Nearly all the higher-yielding currencies, including the Aussie and New Zealand's dollar, are stronger Tuesday.

Canada's currency has done the best Tuesday, rebounding sharply from a drop in oil prices Monday and the greenback's corrective bounce. The U.S. currency fell to as low as C$0.9629 Tuesday, the lowest it has been since June 1976.

Meanwhile, U.S. Treasury Secretary Henry Paulson reiterated Tuesday that China needs to allow its tightly controlled currency to appreciate more rapidly.

Speaking in Washington, he said letting the yuan strengthen faster should be an initial step toward implementing a "fully market-determined currency in the medium term."

His comments follow a similar stance issued by the Group of Seven leading industrial nations over the weekend, urging China to let the yuan rise to help fix global imbalances.

Chinese officials have responded by saying the yuan's exchange rate isn't responsible for China's trade surplus. They said an imbalanced domestic economy is to blame.