Dollar stumbles to new record low vs euro

The dollar hit a record low against the euro for a fourth straight trading day yesterday as confidence grew that central banks would not stand in the way of the greenback's decline.

Mixed economic data from Japan and news of a sharp fall in Italian business confidence failed to draw the market's attention away from the United States' current account deficit and the need for a weaker dollar to correct it.

The euro rose to $1.3641 in the European midsession, surpassing the previous day's high by just one pip. Trade was thin with London, the currency market's biggest trading center, closed for a public holiday.

"There is a very strong consensus that the dollar has further to fall," said Joachim Schuetz, chief economist at UBS in Zurich. "In a very thin market, only a few orders have to go through to push the dollar to technically oversold levels."

The dollar was steady at 103.02 yen as the market digested a warning from Japanese Finance Minister Sadakazu Tanigaki that authorities would monitor foreign exchange markets over the New Year holidays.

Japan has expressed concern about the yen's export-damaging rise against the dollar, but has not conducted large-scale yen-selling intervention since March.

US consumer confidence data and a survey of manufacturing in the Chicago area are due later in the session.

So far in 2004, the dollar has shed around eight per cent versus the euro and the British pound and four per cent against the yen.

Analysts had thought the $1.35 level would be a line in the sand for the European Central Bank's tolerance of euro strength, but recent comments from officials have suggested the central bank is unlikely to intervene in the near term.

On Friday, Dutch Finance Minister Gerrit Zalm said the euro's rise was still within acceptable margins, suggesting little official alarm at the pace of the single currency's gains.

The euro was a touch firmer at 140.45 yen after rising on Monday to 140.74 yen, its highest level since June 2003 and close to an all-time high.

Despite the euro's strength, some strategists reckon the ECB may be reluctant to pick a fight with the markets unless moves become disorderly.

"ECB officials are hoping to set up the euro as the number two currency after the dollar, so they are likely to be cautious (about intervening)," said Hideaki Inoue, chief manager of the forex division at Mitsubishi Trust and Banking.

Some analysts believe Japan has become more tolerant of a stronger yen and would prefer to intervene in coordination with other countries.

Data yesterday showed Japanese industrial output rebounded less than expected in November while deflation deepened.

However Japanese retail sales beat forecasts in November while the unemployment rate fell to 4.5 per cent - the lowest in six years.

Separate data from Italy showed confidence among manufacturing firms fell in December to its lowest since March. The data was worse that market expectations and bucked the trend elsewhere in the eurozone which has seen recovering business sentiment this month despite the surging euro.