A renewed focus on the structural imbalance of the US's $10 trillion economy, and persistent jitters over the threat of terrorism, have pushed the greenback to historical lows against the world's leading currencies in 2003, and the currency's short-term prospects in the first quarter of 2004 are also uncertain.
Even those pathetic photos of Saddam Hussein, the self-proclaimed 'Lion of Baghdad' who seemed to resemble more a cornered sheep when finally captured, failed to lift the US dollar.
The Bank of New York, noted: "As things stand, 2004 appears unlikely to bring with it any degree of lengthy respite for a currency burdened with some rather familiar negatives." BNP Paribas also thinks the US unit--which remains the benchmark currency for much of Africa and the Middle East--will remain under pressure over the coming months.
By the end of 2003, the dollar had fallen to lifetime lows versus the euro, ending the year at $1.264. The European Central Bank (ECB) is upbeat about the resurgent euro--up 21% against the dollar last year. "The strong euro is consistent with economic fundamentals and a sign of confidence in European economy and monetary policy of the ECB." The Bank added that the euro's role in global trade is continuing to increase.
Because Francophone Africa's CFA franc currency is pegged to the euro, it has also strengthened on the foreign exchange markets in the last year, allowing regional central banks to pursue a more lax monetary policy.
Last year also saw the dollar sink to an 11 year trough against the British pound (at $1.794) although sterling's relative strength appears to be partly derived by expectations of higher UK interest rates relative to both Europe and US. Commenting on sterling, HSBC advises: "The pound is at fantastic levels--snatch all of them you can." Most strategists envisage the sterling rally faltering at levels of $1.80.
The dollar is faring no better against many of the world's commodity-based currencies, hitting fresh lows against the Australian dollar, the South African rand and the Norwegian krone. The Japanese yen, meanwhile, was capped at 106.8 by the Bank of Japan's currency intervention policy. This policy of supporting the dollar cost the Japanese central bank a record $180bn during 2003.
So what is the reason behind the falling value of the dollar? Many believe that the factors dragging the greenback lower are, in fact, the same...