Dollar woes ripple through Wall Street
The Federal Reserve faces an increasingly complicated job weighing the need for interest rate cuts to fuel the economy against the inflationary pressures building because of an accelerating decline in the value of the US dollar.
The euro surged to an all-time record against the greenback yesterday, topping $1.50 for the first time in its nine-year history in early morning trading in Asia and continuing its appreciation through the day. Last night, it stood at $1.5119 as the Fed chairman Ben Bernanke’s testimony on Capitol Hill appeared to favour further rate cuts.
A steady drip of poor economic news in the US this week has led foreign exchange investors to underweight the dollar, and it fell yesterday against all the other major currencies. At one point, the pound was back up to within half a penny of the $2 mark, which it traded above during the second half of last year.
The euro, however, was particularly strong, following surprisingly robust consumer confidence figures in Germany earlier in the week, which suggested the eurozone economy is withstanding fears of a global slowdown.
- Source: Independent, Feb. 28, 2008
Reuters says, “The U.S. dollar hit $1.51 to the euro for the first time on record, and fell to historic lows against a basket of currencies, as weak data suggest more interest rate cuts.
Dollar weakness temporarily pushed crude oil above $102 for the first time on record, but sent shares of major U.S. exporting companies higher.”
Meanwhile the New York Times writes, “The dollar breached the level of $1.50 to the euro on Wednesday for the first time as fears of weakness in the United States economy mixed with evidence of resilience in Europe.”
In Asian trading, the euro hit $1.5047 after flirting with the $1.50 level in New York Tuesday. That was the dollar’s weakest position since the euro, now the currency of 15 countries, was introduced in 1999. In New York, the dollar continued to weaken, and the euro was at $1.5120 in late trading.
“Psychologically and symbolically, this is a significant move,” said Tony Morriss, senior currency strategist with Australia & New Zealand Banking Group in Sydney. “The economic numbers out of the U.S. have been uniformly terrible, and we are entering a new phase of dollar weakness.”
The dollar has weakened steadily in recent weeks after recovering from similar levels in November on the emerging realization that the Federal Reserve, despite worries about inflation in the United States, will keep cutting interest rates to protect economic growth at the same time that the European Central Bank is holding rates steady.
The paper also points out that the strong Euro does have disadvantages for Europe. After all, an expensive Euro makes it more difficult, if not impossible, for European companies to be competitive in the US market. In addition, U.S. tourists are likely to avoid European vacations as the costs becomes prohibitive.
Another round of weakness has the potential to increase political tensions in Europe, though so far France is the only country that has consistently complained about the strong euro. Though it has acknowledged the potential costs of a stronger euro, Germany has remained upbeat, saying it is not worried.
Volker Trier, the chief economist of the German Chambers of Industry and Commerce, largely echoed this view on Wednesday.
“The euro’s strength is hurting here and there,” Mr. Trier said, according to Reuters. “Over all, though, the economy can still cope with it well.”
- Source: New York Times, Feb. 27, 2008