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SCMP Reporter

Traditional hedge gold edges up to 16-year high as  US dollar declines against the euro and Asian units

Strong payroll numbers for last month failed to stem the US dollar's decline yesterday, with the greenback plumbing new record lows against the euro and falling against most other leading  currencies in Asian trading.

Local spot prices for gold - a traditional refuge during times of greenback frailty - edged up 0.3 per cent to a 16-year high of US$435.25 an ounce at midday.

Instead of focusing on signs of economic growth, Asian investors concentrated  on the United States' budget and trade deficits, analysts said.

With regional central banks less concerned about currency appreciation, the path of least resistance for the dollar was down,  they said.

Expectations that the  yuan will be allowed to appreciate against the dollar in the next six to 12 months is also adding to upward pressure on Asian currencies.

'[Asian] central banks are not so paranoid about stronger currencies,' said JP Morgan foreign exchange strategist Claudio Piron, as stronger  currencies help regional economies offset  rising  costs of imported oil and other commodities.

According to recent data from the  Bank of Japan, it did not intervene to slow the yen's third-quarter rise. The Bank of Korea on Sunday criticised the South Korean government's policy  of keeping its currency weak, saying the  value of the won should be left to the market.

The  won jumped 0.48 per cent yesterday to 1,110.50 to the US dollar, its strongest level in more than four years. The Singapore dollar rose 0.24 per cent to S$1.6518, a level not seen since January 2000.

The Taiwan dollar, supported by foreign fund inflows  before the upgrade of Taiwan's weighting in Morgan Stanley Capital International's indices at the end of this month, rallied 0.55 per cent to a seven-month peak.

The Hong Kong dollar strengthened to an eight-month high of $7.7699 against the greenback, prompting the Hong Kong Monetary Authority to  buy $1.55 billion worth of US dollars to  stem a further advance of the local currency.

The fundamental downside risk for the US dollar had been reinforced after  US President George W. Bush's re-election  for another four years, analysts said.

'The [Bush] administration's first term oversaw the largest US fiscal deterioration since [the second world war],  and judging from the campaign rhetoric there appears little incentive to turn that trend,' analysts at Lehman Brothers noted in their latest foreign currency strategy report.

'On the dollar, the Bush administration is likely to continue its policy of benign neglect, although with the current account deficit becoming a larger concern in global policy-making circles, there is a risk that it  might opt for an outright weak dollar policy,' they said.

Measured by the Fed's trade-weighted major currency dollar index, the dollar has shed 21 per cent since Mr Bush took office in January 2001.

However, European Central Bank president Jean-Claude Trichet brought some relief  yesterday  by noting that the  euro's rally was 'not welcome' by the bank.

The euro fell to $1.2928 in early New York trading from a high of $1.2987 in Asia - a record since the single European currency's debut in 1999. The dollar strengthened slightly to 105.69 yen from 105.58, but was still below the 106.10 yen it traded at late in Asia on Friday.

Investors continue to buy  gold as a  hedge against the uncertainties posed by the dollar's decline.

Owen Mak, a bullion dealer at Delta Asia Financial Group,   said   bullion  could rise  a further US$10 per ounce by the end of the year.

'Hedge funds and speculators generally equate Bush with a weak dollar and thus a stronger gold price,' Mr Mak said, adding  that the price would see short-term consolidation if the Federal Reserve decided to raise interest rates.



Greenback plumbs new lows