Dollar’s decline limited as Europe’s problems persist, analysts say

The dollar declined slightly on Monday
as investors reconsidered the impact of fiscal problems in some of Europe’s smaller economies, or a possible rescue effort
from their stronger neighbors, that drove the greenback to a seven-month high versus major rivals last week.

The
decline was limited as fears of a sovereign default in southern Europe have shown the U.S. currency still serves as a safe
haven when investors step away from taking risks.

“Euro-zone credit and deficit concerns continue to dominate headlines,
but the fears are likely overblown in the near term,” wrote Brian Dolan, currency strategist at Forex.com. “The risk of default
is minimal and unlikely in the year ahead, but the drama of the ‘fiscal crisis’ is likely to drag on for many more months
at the minimum.”

The euro (CUR_EURUSD) rose to $1.3674 from $1.3659 in North American trade late Friday. Earlier,
it declined to $1.3620.

The dollar index (DXY), which
tracks the greenback against a trade-weighted basket of six major currencies, declined to 80.309 in recent action, backing
off higher levels in earlier trading and from 80.460 late Friday.

The dollar bought 89.39 Japanese yen, little changed
from last week.

On Friday, the dollar index touched 80.683, the highest level on a closing basis since July as investors
moved assets from equities and riskier sectors to relatively safer territory in the wake of a dip in U.S. nonfarm payrolls
for January.

On Monday, the yield spreads Greece, Portugal and Spain must pay on their debt rose, and the cost of
insuring Spain and Portugal’s debt rose to new records. Higher spreads indicate less willingness among investors to hold the
securities.

“The backdrop of the ghastly Greek situation just won’t go away,” said Andrew Wilkinson, senior market
analyst at Interactive Brokers. “The dollar seems to have given over its crown of least appeal to the euro zone for now and
is faring better as a safe haven basis.”

European Union officials attending the weekend meeting of finance ministers
and central bankers from the Group of Seven industrialized nations offered a united front on Greece, saying they were confident
Athens would be able to cut its deficit and vowing to closely monitor the Greek government’s efforts.

Economists
said the meeting offered little in the way of concrete assurances about the situation in southern Europe, however.

“The U.S. dollar has benefited from being the ‘anti-euro’ in an environment where sovereign risk concerns in Europe have again
thrown into question the long-term viability of currency union without political union,” said HSBC currency strategists led
by David Bloom.

The Greek government aims to slash its deficit from 12.7% of gross domestic product in 2009 to 2.8%
— under the euro zone’s 3% limit — by 2012.

Peripheral countries will also need plentiful liquidity to work out
their problems, which will keep the European Central Bank from raising rates or withdrawing its other liquidity measures,
said Steven Pearson, head of G-10 currency strategy at Bank of America Merrill Lynch.

“We expect a later start date
for monetary policy tightening while this issue is on the front pages,” Pearson said. “That’s a negative for the euro.”

The euro will end the year near $1.28, he said.

Over the longer term, the tension between slow- and fast-growing
members of the euro-zone, which each have separate fiscal policy makers and no ability to depreciate the currency, will ultimately
weigh on the euro which so many analysts had expected to become the most plausible reserve currency as an alternate for the
U.S. dollar, Pearson said.

Meanwhile, all the stressed countries can do is lower wages, which has already triggered
massive strikes in Greece.

“We expect Greece to muddle through,” he said.

“The market will question how
long or solid the political will is to continue on this painful course.

“Until that’s resolved, the euro’s ability
to function as a reserve currency option to the dollar is undermined.”

Copyright © 2009 Dow Jones Newswires