U.S. dollar slides, but intervention unlikely

By Steven C. Johnson and Jamie McGeever - Analysis

NEW YORK/LONDON (Reuters) - Central banks are not quite ready to prop up a weakening U.S. dollar, but that could change if inflation rises, investors shun U.S. assets and a sluggish U.S. economy starts to drag world economic growth down.

As long as it doesn't happen too fast, a dollar decline is exactly what Washington is after because it boosts U.S. exports and narrows the country's massive current account deficit.

Also, intervention in currency markets would undermine U.S. efforts to get China to float its currency, the yuan, more freely, thereby addressing the global imbalance between nations running huge trade and current account deficits and surpluses.

"There's probably agreement right now that a dollar decline is not such a bad thing, given the trade imbalances and the weakness of the U.S. economy relative to the rest of the world," said Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co. in New York. "So I don't see the urgency for intervention right now."

The dollar tumbled to a record low against the euro for the sixth straight day on Thursday, and hit an all-time low against a basket of major currencies .DXY.

The latest dollar slide was triggered when the Federal Reserve cut interest rates last week to boost an economy starting to groan beneath the weight of a worsening U.S. housing slump and a credit squeeze sparked by losses on risky U.S. mortgages.

Since early 2006, the euro has climbed from $1.18 to just shy of $1.42 as dealers priced in prospects for slower U.S. economic growth.

Of course, given the dollar has fallen nearly 4.0 percent versus the euro this month alone, and the possibility of a currency discussion at next month's meeting of leaders from the Group of Seven wealthiest nations, talk of intervention has increased in markets.

"Policymakers are concerned again about dollar weakness, the Fed is still worried about inflation, the French believe the euro is overvalued and even German ministers are showing concern," said Mansoor Mohi-Uddin, director of foreign exchange strategy at UBS in London.

But Japanese Finance Minister Fukushiro Nukaga said on Thursday he does not expect special discussions of currencies at the meeting.

Also, the weaker dollar has helped shrink the U.S. trade deficit by nearly 8 percent this year to July

What's more, global economic growth is holding up even as the United States slows, making other economies able to absorb imports.

THE SAVING GRACE OF GLOBAL GROWTH

Coordinated intervention has been rare since the 1985 Plaza Accord, when central banks in Europe, Japan and North America stepped in to depreciate the dollar.

Japan unloaded some 35 trillion yen in 2003 and 2004 to stem yen appreciation but hasn't intervened since.