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Dollar slumps, pushing euro to 19-month high
Posted: 24 November 2006 2353 hrs
LONDON : The dollar has fallen to a 19-month low of 1.3085 to the euro on concerns about a slowdown in the US economy, but some analysts said they could see no clear cause.

The single European currency had risen at one point to 1.3109 dollars from about 1.2950 on Thursday evening, or its highest level since April 21, 2005.

One analyst suggested that the euro might rise to 1.34 dollars by the end of the year.

The dollar meanwhile fell to 115.65 yen, its lowest level since September.

The rise of the euro was a continuation of a trend that has pushed it up by 2.5 percent against the dollar since Tuesday, when it was being traded at 1.28 dollars.

Capital Economics consultants commented that "this morning's sharp fall in the dollar against other major currencies is all the more significant because there is no convincing trigger".

An economist at Calyon bank, Daragh Maher, said: "I don't think we've had a big reassessment of the fundamentals. What we've had over the last few days is the break that the market was kind of hoping for for a number of weeks."

The dollar has been weakening since the start of the third quarter because of a slowdown in US economic momentum, particularly a downturn in the housing market.

From an annual rate of 5.6 percent in the first quarter, growth has decelerated to 2.6 percent in the second quarter and 1.6 percent in the third.

Revealing more bad news, the White House on Tuesday revised downward its growth projections for both 2006 and 2007.

As a result of such a turnaround, analysts do not see how the US Federal Reserve, which has not raised changed rates since taking them in June to 5.25 percent, could justify tightening credit.

"The higher euro-dollar is consistent with the news we've had for a couple of months: a slowdown in the US, and the ECB (European Central Bank) comfortable with the outlook in the eurozone, which points towards a narrowing of interest rate differentials," Maher said Friday.

The ECB has virtually promised to lift its base lending rates to 3.50 percent in December. With its vigillance on inflation, a continued increase in rates appears likely through next year.

And while US rates stay put -- perhaps even dropping in the first quarter of 2007 if the Fed wants to avert a crash landing for the US economy -- European rates are upward bound, which leads to a narrowing of interest rate differentials that until now has helped the dollar.

"Late-year moves tend to gather greater momentum especially when the investment community has not had a fantastic year making returns on foreign exchange," according to Divyang Shah, economist at IdeaGlobal.

"We could see the euro at 1.34 dollars and the dollar at 113 yen by year-end," he added.

The euro was changing hands at 1.3085 dollars against 1.2948 on Thursday, 151.34 yen against 150.47, at 0.6769 pounds (0.6762) and 1.5817 Swiss francs (1.5844).

The dollar stood at 115.66 yen (116.25) and 1.2089 Swiss francs (1.2237).

The pound was being traded at 1.9330 dollars (1.9154).

On the London Bullion Market, the price of gold rose to 636.00 dollars per ounce, from 630.25 dollars late Thursday.