Dollar Plumbs New Depths
Wednesday February 27, 7:17 AM EST
BERLIN (AP) — The dollar sank to new lows in Europe Wednesday following a series of dour reports on the U.S. economy and expectations that the Federal Reserve will continue slashing interest rates.
The 15-nation currency hit a series of highs, culminating in $1.5087 before falling back slightly to $1.5031, nearly a full cent more than the $1.4967 it bought in late trading in New York on Tuesday.
Tuesday's high matched a record high set in November.
The British pound soared to $1.9971 before falling back to $1.9857, down from $1.9862 late Tuesday, while the dollar fell to 106.90 Japanese yen, from 107.26 yen.
Along with the rising pound, which is nearing $2 again, the muscular euro will not be kind to Americans visiting Europe. They'll have to pay more for a hotel room in Rome, more for entrance to the Louvre in Paris and more for chocolates in Belgium.
On the other hand, the stronger euro makes shopping trips to the U.S. more appealing to Europeans.
A higher euro also makes goods from the euro-zone more expensive for customers abroad, and cuts into manufacturers' profits if they try to keep the U.S. dollar price of products constant.
In Paris, France's budget minister Eric Woerth called the euro "a handicap for our exports."
Howard Archer, the chief UK and European economist for Global Insight, said the euro's strength is not likely to weaken anytime soon, given that any "worsening in U.S. interest-rate differentials dilutes a key support for the dollar."
Weaker growth prospects in the United States, coupled with its deficit, will "exert a significant downward influence" in the long term and cause some countries to shift more of their reserves from dollars to other currencies, including the euro, Archer said.
"In addition, there is the very real possibility that several countries could switch a proportion of their foreign currency reserves out of U.S. dollars over time," he said.
Gary Thomson, an analyst with CMC Markets in London, said markets will be looking for clues from Fed Chairman Ben Bernanke about more rate cuts in the U.S. when he addresses lawmakers Wednesday.
Investors shrugged off a 1 percent rise in the producer price index this week, but the data could effect rate decisions coming out of the Fed.
"Inflation — or perhaps more to the point stagflation — remains a concern for the Fed as seen with yesterday's PPI data and as a result now that the most significant of psychological levels since parity has gone, we could see further downside pressures emerging for the greenback," Thomson said, referring to a string of disappointing economic reports out of the U.S. on Tuesday.
The New York-based Conference Board's Consumer Confidence Index fell to 75 in February from 87.3 in January, its lowest level since February 2003. In addition to the wholesale inflation number that was worse than expected, Standard & Poor's reported that U.S. home prices fell 8.9 percent in the last three months of 2007 from a year earlier, its sharpest drop ever.
Those reports, along with remarks by Federal Reserve Vice Chairman Donald Kohn that appeared to diminish inflationary concerns and focused instead on greater near-term risk to growth were seen as a clue that more rate cuts may be forthcoming.
The European Central Bank, which has left its own rates unchanged since last summer, is expected to keep them at 4 percent when it meets next week.
Lower interest rates can jump-start a nation's economy, but may weigh on its currency as traders transfer funds to countries where they can earn higher returns.
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