On the bright side...

Cheap holidays in New York!

The dollar continued its decline in global currency markets yesterday, intensifying worries among some economists that mounting U.S. budget and trade deficits could send the U.S. currency into a tailspin.

But John B. Taylor, the Treasury undersecretary for international affairs, defended the Bush administration view that the deficits pose no danger of a dollar collapse. He issued a detailed rebuttal of what he called "scare stories."

The dollar fell yesterday to within a fraction of a cent of its all-time low against the euro of $1.2930 , trading as low as $1.2898 before rallying slightly to close at $1.2867. It fell modestly against the Japanese yen, and continued a sharp slide against the Canadian dollar, which rose to 83 U.S. cents yesterday for the first time in 12 years.

It was the second straight day that the dollar has fallen despite a surge in the stock market, continuing a trend that began in early October when it started slipping against the currencies of major U.S. trading partners. The declined rekindled the fears of some analysts that the dollar could be headed for a severe sell-off unless the White House and Congress make a major effort to shrink the budget gap.

"As the dust settles after the U.S. elections, the one theme that is developing is the growing recognition [in the markets] of the need for more dollar depreciation," economists at J.P. Morgan told clients yesterday, citing as one major reason the likelihood that "there will be no serious new policies to trim the U.S. budget deficit."

Behind such sentiments is the belief that the U.S. economy is too dependent on foreign investors, and that they may balk at pouring money into U.S. securities if the country's debt continues to soar. Foreigners have provided much of the money the government borrows to cover its deficit, which was $413 billion in the fiscal year ended Sept. 30.

"One of the big drivers in the whole big picture the markets are looking at now is our being dependent on foreign sources of funds," said David Solin, managing partner at Foreign Exchange Analytics in Essex, Conn. "Obviously, if the foreigners step back [from investing in U.S. bonds and stocks], there are going to be serious problems, not only for the dollar, but for all financial markets."

(via TPM)