Dollar Sinks to New Low Amid Deficit Fears

The dollar today sank to record lows against the euro and three-year lows against the yen amid concern that the US will have trouble financing its huge trade deficit.

The sharp fall in the greenback followed a US government report showing a steep drop in demand for US stocks and government bonds.

Declining demand for US financial assets makes it harder for the US to finance its current account deficit, the broadest measure of trade and investment. The deficit, currently running at around 5% of gross domestic product, is one of the biggest drags on the dollar.

According to US treasury department data yesterday, foreigners' net purchases of US treasury bonds and notes fell steeply to $5.6bn (£3.2bn), down from $25.2bn in August.

"It is too early to ring all of the death knells for the dollar, but going forward ... I do think that as this bearish dollar trend remains in place, even in the face of strong US data, it has to hurt foreign appetites for US assets," Lara Rhame, senior economist with Brown Brothers Harriman in New York, told Reuters.

The dollar also came under pressure against a backdrop of rising trade tension as the Bush administration said it intends to limit imports of some textiles and clothing from China, with which the US has a big trade deficit. There is already considerable trade friction between the US and the EU. Last week, the World Trade Organisation said that US tariffs on steel imports were illegal.

A declining dollar would help US exports, boost economic growth and safeguard jobs, all crucial objectives for George Bush as the US president seeks reelection next November. While US officials cannot come out openly in favour of a weak dollar, it is an open secret in financial circles that the Bush administration would like to see a fall in value in the currency. But the perception that the White House may pursue a weaker dollar in the future would put global investors off holding US assets.

A weaker dollar would also spell trouble for the European economies struggling to shake off sluggish growth. Germany has been particularly reliant on exports to boost its moribund economy and a stronger euro will hit exports to the key US market.

The head of Germany's BDI industry federation said he was "extremely worried" by the current level of the euro and disturbed that the end of the euro's rise did not yet appear to be in sight.

"It really hurts," said Michael Rogowski, BDI president. "I pray every night, and also sometimes during the day, that the trend will turn around.

In London, the euro was worth $1.1911 compared to a previous low of $1.1933 in May.