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The dollar plunged to a two-year low versus Japan's yen Tuesday, and retreated against other major currencies, on fears the U.S. economy has fallen into a recession, Bloomberg News reported.The dollar fell 1.26 yen to 106.90 versus the yen. Meanwhile, the British pound rose about 1.5 cents to $1.9704 in mid-day Tuesday trading. The dollar was virtually unchanged versus the euro at $1.4862.
Economists and analysts say a recession in the United States would invariably drive the dollar lower, due to foreign investors' reduced demand for dollar-denominated U.S assets, many of which would underperform during a recession. The dollar also would be hurt by lower interest rates, a near-certainty in the months ahead, with the U.S. Federal Reserve widely expected to again cut benchmark, short-term interest rates to jump start the U.S. economy.
Concerns about U.S. economy
Independent currency trader Andrew Resnick told BloggingStocks on Tuesday that a slowing U.S. economy is not what the dollar bulls needed right now.
"One of the bright spots in the dollar equation had been the U.S. economy. The [U.S.] trade deficit and [U.S.] budget deficit are certainly working against the buck but the dollar bulls could always point to the U.S. economy with its star-performing assets," Resnick said. "Take that away and you can see which direction the dollar is likely to head. The U.S. economy is taking the remaining talking points away from the dollar bulls." Resnick added that he was flat, or had no currency positions, Tuesday at mid-day, after being stopped-out for losses with two dollar-long day trades early this morning
Other factors: ECB, BOJ
Resnick added that the European Central Bank and the Bank of Japan are also factors in the dollar's recent declines. The ECB, Resnick said, has signaled to the markets that "they'll remain vigilant on inflation and that they have no intention of cutting rates anytime soon." Meanwhile, the Bank of Japan -- whom many traders fear the most -- so far has not intervened to support the dollar, a surprise. The yen "sliced through 109 to the dollar, to everyone's surprise, without an action by the Bank of Japan," Resnick said.
Some traders now expect the yen to test, or fall to 104 yen to the dollar, in the weeks ahead, but Resnick is not convinced.
"The next key support is 105 yen to the dollar, but even at present levels of 107 yen, Japan's exporters who take in revenue in dollars will take a currency conversion hit or they'll have to raise prices," Resnick said. "Historically, the Bank of Japan has not liked either of those scenarios, so I'm not convinced yet they're going to let the dollar fall to 104 yen."
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