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Downtrodden dollar near rock bottom

By Ben Rooney, staff reporter


NEW YORK (CNNMoney.com) -- After freefalling for weeks, the U.S. dollar appears to finally be groping for a bottom.

The dollar has been in a tailspin since late August, when comments from Federal Reserve chairman Ben Bernanke raised speculation that the central bank will announce additional stimulus measures in November.

But investors say the market has "priced in" the expected Fed move, clearing the way for the dollar to find support around current levels.

The dollar index, which tracks the greenback against a basket of currencies, fell to a low of 76.5 this week from a high above 83 in late August. But the dollar rebounded Thursday against the euro, pound and yen -- a good start say analysts.

"But with the Federal Reserve gearing up to ease monetary policy, there is still a reasonable chance that the greenback will fall even further," said Kathy Lein, currency strategist at firm GFT in New York.

The Fed is widely expected to announce plans to resume large-scale purchases of U.S. Treasuries, a strategy known as quantitative easing, at the conclusion of its next policy meeting Nov. 3. The goal is to lower long-term interest rates and pump money in to the economy.

In anticipation of the move, investors have flocked riskier assets such as stocks and commodities, to the detriment of the dollar.

Meanwhile, Lien said the greenback could gain traction if the Group of 20 leading economies can reach some consensus on global exchange rates and international trade policies.

The G-20 kicked off a three-day meeting of finance officials and central bankers from around the world Thursday in Korea against a backdrop of growing tensions about a potential currency war. But no official decision on exchange rates is expected before G-20 leaders meet next month in Seoul.

U.S. Treasury Secretary Tim Geithner said Wednesday that he would push his counterparts at the G-20 meeting to cooperate on currency policies.

"We would like countries to move toward a set of norms on exchange-rate policy," he said in an interview with The Wall Street Journal.

Geithner also said the world's major currencies "are roughly in alignment now," suggesting that he sees no need for the dollar to depreciate further against the euro and yen.

"If Geithner believes that currencies are fairly valued, then he could be more willing to support actions that would strengthen the dollar," said Lien.

However, the weak dollar has been a boon for American exporters, a rare bright spot in the down economy, and many analysts say U.S. policymakers are in no hurry to reverse the greenback's slide.

At the same time, U.S. officials have been increasing pressure on China to allow its currency to appreciate against the dollar. The artificially weak yuan, they say, is giving China an unfair trade advantage.

China announced plans earlier this year to allow the yuan, also called the renminbi, to float in a trading range. But critics say the moves have been minor and that China needs to do more to loosen its currency policy.

In an apparent effort to defuse tensions, an early draft of the G-20 communiqué, leaked Thursday, reportedly contains a pledge to avoid "competitive undervaluation" of currencies, and efforts to establish a "more market-determined exchange rate system."

"This message already appears to be halting the slide in the dollar against the euro and sterling," said Julian Jessop, an economist at Capital Economics.

He said the draft communiqué could also be seen as increasing pressure on China to allow the yuan to appreciate, though he said it is unlikely that Chinese officials will follow through on any agreements.

"China clearly continues to operate a simple dollar peg," he said. "Any apparent concessions from China on exchange rates this weekend therefore deserve to be met with skepticism." To top of page

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