View from City Road: Grim times for the greenback

It was the narrowest of election victories for Chancellor Helmut Kohl, but that was enough for financial markets. Other currencies were all marked lower against the mighty mark yesterday - none more so than the dollar, where the German election result was simply a handy excuse for traders to sell a currency that investors cannot think of any good reason to hold. The US currency fell against the yen too, resuming a path of decline that had been only temporarily reversed by the partial success of US-Japanese trade talks last month.

It did not help that central banks were rumoured to be intervening on opposite sides of the market yesterday. The Bank of Japan had bought greenbacks overnight, and the Fed was rumoured to be intervening to support the currency, but dealers said European central banks were sellers. While co-ordinated intervention by central bankers now seems to be a thing of the past, a free-for-all in currency markets is plainly ridiculous.

The real problem for the dollar is that big international investors have no interest in it. Since the beginning of the year, central banks' purchases of US treasury bonds have dried up completely while private foreign investors' purchases have dwindled from nearly dollars 200bn per annum at the end of 1993 to about dollars 25bn now.

Japanese institutional investors switched funds out of the US, first back home and subsequently into European markets. There is no reason for them to revert. US yields are low and the bond market is too unstable to provide much prospect of capital gains. What's more, there is now too much currency risk for overseas investors.

The Federal Reserve might have been able to counter the pressure on the dollar with a bold and early interest rate increase, but it is now too far 'behind the curve' for this to help much. Financial markets have already priced in a half-point increase in short-term interest rates next month.

For currency traders, next month is 'the long term' but, even persuaded to gaze beyond that horizon, none can see what might revive investor interest in the drooping dollar.