Dollar Nears Record Low Against Euro


The dollar fell broadly on Wednesday and neared a record low against the euro as strong euro zone economic data renewed focus on the divergent paths of European and U.S. interest rates.

The greenback had rallied sharply the previous session after the Federal Reserve said it would lend primary dealers $200 billion in Treasury securities and accept a wider array of mortgage debt as collateral to help ease tight credit markets.

But those gains fizzled out in European trade as the dollar plunged by 1 percent versus the yen. The euro soared to $1.5491, just shy of a record high, after euro zone data showed industrial output rose by much more than expected in January.

That bolstered the view that the European Central Bank need not rush to cut interest rates. The Fed, though, is still seen cutting its benchmark rate at a March 18 meeting despite its efforts on Tuesday to improve financial market liquidity.

Meanwhile, he said the Fed's recent move to get money flowing in financial markets "addresses short-term liquidity issues but doesn't address underlying credit concerns and the U.S. housing decline, which have not gone away."

The euro last traded at $1.5475, up 0.9 percent on the day and just below an all-time high of $1.5495. Strauss said a move to the round number of $1.55 could spark some dollar buying but said that was unlikely to be sustained.

The euro is up 6 percent against the dollar so far this year and 18 percent in the last 12 months.

The dollar also fell 1 percent to 102.32 yen, heading towards Friday's eight-year low around 101.40 after rising to 103.59 on Tuesday. It fell 1.2 percent to 1.0211 Swiss francs.

Although markets have trimmed their bets for Fed rate cuts on the liquidity news, they are still pricing in a 2-in-3 chance of a 75 basis points easing this month alone.

This compares with expectations of less than 50 basis points of cuts from the ECB over the whole of 2008. The benchmark fed funds rate currently stands at 3 percent, while the euro zone refinancing rate is set at 4 percent.

With the euro up sharply against the dollar, investors will look for any comments from policymakers on exchange rates.

Some analysts said speculation that Middle East oil exporters may drop their currency pegs to the dollar was also weighing on the U.S. currency.

The dollar pegs make it harder for countries to fight rising inflation at a time when record oil prices are bringing massive cash inflows into their economies.

Also on Wednesday, Jordan said it was set to reducing the U.S. currency's composition in its reserves.

China's commerce minister said his country should hold its reserves in various currencies ID:nL12701672, also raising the specter of dollar selling.

 


TradingEconomics.com, Reuters
3/12/2008 6:50:28 AM