PEN-L message, Dollar hits record low against euro

Dollar hits record low against euro

By Peter Garnham

The Financial Times Limited 2007Published: September 11 2007 17:14 | Last updated: September 12 2007 10:31

The dollar dropped to a record low against the euro on Wednesday as concerns over a US economic slowdown continued to weigh on the beleaguered currency.

The dollar fell to $1.3878 against the euro, breaching its previous record low of $1.3852 it hit on July 24.

Meanwhile the dollar index, which tracks its value against a basket of six leading currencies, fell to 79.459, its lowest level since September 1992.

The dollar had been benefiting from the recent turbulence in financial markets as US investors repatriated funds in the face of rising risk aversion.

However, that trend stopped as weak economic data saw the focus of the currency markets switch to the challenges faced by the US economy.

?In the past the dollar has been a clear beneficiary of rising risk aversion, but this has been dependent on risk aversion being a global phenomenon rather than a US problem,? said Mitul Kotecha, head of global foreign exchange research at Calyon.

?Over recent days the problem has shifted back to being US-centric as it increasingly appears that the US economy will suffer more than elsewhere.?

The catalyst for the change in mood was last Friday?s US payrolls data, which revealed the first drop in employment in four years and provided the first evidence that problems in the country?s mortgage market were spilling over into the wider economy.

This saw markets move to fully price in a cut in interest rates from the Federal Reserve at its meeting on September 18.

In contrast, the European Central Bank signalled at its policy meeting last week that it was maintaining its monetary tightening bias and stood ready to raise eurozone interest rate once stability returned to the world?s financial markets.

?The market has moved beyond whether or not the Fed will lower interest rates and is now focusing its attention on why it will ? namely, the risk the US economy will slow materially,? said Camilla Sutton at Scotia Capital.

The lack of liquidity on the world?s lending markets has also increased the probability that the Fed will cut interest rates to stop the US economy from slipping into recession.

Activity on the world?s money market suggested continued mistrust between financial institutions over lending to each other.

Analysts said the longer that reluctance to lend persisted, the greater the impact would be on corporations and consumers who would have to pay abnormal levels of interest rates to borrow funds.

Higher money market interest rates in the US at a time when the housing market was collapsing and the labour market was weakening would prompt the Federal Reserve to act to cut interest rates next week, analysts said.

?We expect the dollar to weaken in response to not just the monetary action but to further weak economic data that indicates that the fallout from the housing market has spread to other areas of the economy,? said Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ.