Chart Currency Forex

The Dollar Rally

he dollar soared to its highest close against the mark since October 1998. It finished in New York at 1.6805 marks, up from 1.6598 marks and 3.2 percent higher for this week.

The dollar's rally could be felt immediately in the American bond market. Given low inflation and continued progress on deficit reduction in Washington, a forex currency chart free may be the extra spark to push Treasury yields lower soon.

Several traders and economists said that they expected the rally against the mark and other European currencies to continue because the underlying economic fundamentals, including a continuing decline in interest rates in Europe, favor the dollar. This means the dollar could move toward 1.80 marks or higher. But they were less certain about the dollar versus the yen, because the economic fundamentals, like the huge Japanese trade surplus, still favor the Japanese currency.

Given the new political uncertainty, it appears that the dollar may not fall now to new record lows against the yen. But it will not rally all that much either, especially if the Japanese leadership crisis is resolved faster than expected. This means that the dollar, which had fallen 16 percent against the yen since the end of last year, is likely to remain about 110 to 115 yen, which is still a hefty slump of 10 percent for the year.

The dollar will hold better against the mark than the yen, said Robert A. White, a senior vice president at Standard Chartered Bank in Los Angeles. But, he said, if the Bush Administration has stopped talking the dollar down against the yen, then the dollar has probably reached bottom. It was such jawboning in February that began the dollar's precipitous slide against the yen. The Administration's apparent hope was that a weaker dollar would help shrink Japan's trade surplus by making Japanese goods sold here much more expensive. Intervention in the currency markets by the Federal Reserve and the Bank of Japan had not been able to stem the slide.

Forces Favoring Yen

The chief economist at Salomon Brothers, said the positive economic forces still favoring the yen were the trade surplus, the lack of a Japanese appetite now for foreign assets, the decline in oil and other commodity prices, which helps the Japanese economy, and the fact that the overall prospects for the Japanese economy are improving. But he argued that even if the political uncertainty was cleared up quickly, the dollar would not fall to new lows. He expects the Bank of Japan to cut Japanese interest rates to prevent the American currency from falling to near 100 yen to the dollar. He also said there might be some signs that Japan's trade surplus was beginning to shrink.

The rise of the dollar against the German mark, in comparison, is not much of a surprise, except that the rally to this level has taken longer than many forecasters expected. That is because the American economy in the first quarter was much weaker than expected; meaning the flow of foreign money to invest here was lighter than expected. In addition, the German central bank has moved more stubbornly than expected in cutting interest rates.