Updated from 3:48 p.m. EDT
The dollar's sharp decline in recent weeks, while unnerving, isn't likely to trigger a mass exodus from U.S. stocks and bonds, experts say.
While hitting a 27-month low against the euro Monday, the dollar also reached its lowest level in almost seven months against the yen amid persistent weakness in the U.S. economy and stock market.
The dollar fell to 98.11 cents per euro, its lowest level since Feb. 29, 2000, while Japan's yen traded at 121.21 per dollar despite an intervention by the Bank of Japan for the fifth time in as many weeks.
Lately, the dollar was above its worst levels of the day, changing hands at 97 cents to the euro and 121.68 yen as the major U.S. stock averages recovered from their dive earlier in the session.
The selloff fueled fears that overseas investors will take money out of other dollar denominated assets because a decline in the value of the dollar reduces the value of stocks and bonds to foreigners.
"My real concern is that you see foreign money start to leave and you already have a liquidity problem," said John Hughes, market analyst at Shields & Co.
The concerns are well founded. In the first quarter, overseas purchases of U.S. stocks fell to $25 billion from $33 billion in the prior quarter while sales of corporate and Treasury bonds were also down sharply.
In a Little White House
David Gilmore, an analyst at Foreign Exchange Analytics, said a wholesale pullout by foreigners could potentially be devastating because overseas investors are principally responsible for financing the current trade deficit. The U.S. trade gap reached a record $35.9 billion in April, as imports jumped nearly 5%.
Still, he noted that money continues to come into the U.S. from abroad, albeit at a reduced pace, and that the US economy is actually performing "quite well."
"To go from funding
the trade deficit and putting money in the U.S. to pulling it out is a 180 degree turn, there are a lot of shades in between," he said.
Other analysts agree that a mass departure from U.S. financial assets is unlikely because Europe and Japan continue to struggle economically, despite a climb in their respective currencies.
European equity markets are hovering around nine-month lows while Japan's Nikkei index is only up 3.5% so far this year (down in local currency) as a result of dollar weakness.
"All the things that weakened the euro in the first place are still there but the market is looking past that right now," said Jamie Coleman, an analyst at IFR/Thomson Financial.
Coleman believes the euro could rise to $1.05, but will likely pull back this summer as higher export prices dampen the nascent economic recovery.
Meanwhile, many analysts believe that Federal Reserve Chairman Alan Greenspan simply will not tolerate an exodus from dollar-denominated assets if the U.S. currency continues its descent.
"Continuing dollar weakness will not be accepted by either the U.S. or European monetary authorities," said Michael Paulenoff, an analyst at 2Mstrategies.com, adding that markets "should be prepared to witness dollar interventions soon."
The dollar has fallen 9% against the euro this year and 7% against the Japanese yen amid concerns about the sluggish economy and faltering stock market.
Like many economists, Lara Rhame of Brown Brothers Harriman isn't expecting the euro to hit parity this year, saying it has probably peaked out for now.
"No one's buying the euro because they think the euro zone's growth is so spectacular or because they think it's going to outperform. They're simply nervous enough to want to keep their money at home," she said.
"If the dollar decline is more of an erosion like we saw in May, then that would not lead to international investors selling dollars or dollar assets just for the sake of selling."