No Relief for Ailing Dollar as Sterling Hits High
NEW YORK ~ The struggling US dollar faced renewed selling pressure on Wednesday as sterling jumped to a 26-year high and the euro topped $1.36 amid fresh concerns about US economic prospects.
The euro reached as high as $1.3616 before falling back to $1.3607 at 2100 GMT against $1.3564 late on Tuesday in New York. The single currency neared its all-time high of $1.3666 on December 30, 2004.
The British pound struck $2.0133 to reach its highest reading since June 1981. It later traded at $2.083 against $2.0063 on Tuesday.
Sterling’s all-time high against the dollar is $2.4546, reached in 1980.
In late New York trade, the dollar stood at 118.66 yen after 118.90 on Monday and at 1.2036 Swiss francs from 1.2086.
The weakened dollar “reflects a combination both of concerns about the US economy … and at the same time the contrasting strength of the European economy, which is growing much more rapidly,” Capital Economics analyst Jonathan Loynes said in London.
“Those concerns have been reflected in expectations for interest rates,” he added.
Camilla Sutton, currency strategist at Scotiabank, said the market was expecting rate cuts in the US despite rhetoric to the contrary from Federal Reserve officials.
A softer-than-expected report on inflation “has relieved some fears that the Fed might not have the ability to cut rates in 2007,” Sutton said.
“Our view continues to be that on the back of a slowing economy, the Fed will cut rates twice in the third quarter and the dollar will be weak leading into these cuts.”
Owing to strengthening European economies, particularly in Germany, the market is forecasting higher interest rates for the eurozone and Britain in the coming months.
“Pound strength continues to build following yesterday’s (Tuesday’s) historic move above $2 on the back of the stronger-than-expected” British inflation data, ABN Amro analyst Peter Frank said.
The inflation data increased expectations that British interest rates will soon be increased to contain activity and price rises.
Meanwhile the eurozone, and particularly the German economy, is showing unexpectedly strong growth despite the strength of the euro, which can increase the price of exports on foreign markets and dampen overall economic activity.
Last week the European Commission forecast that the eurozone would keep up a quick pace of growth while broadly sticking to previous estimates.
The International Monetary Fund said the United States was experiencing a “growth pause.”
In the United States and Britain, the key rates stand at 5.25 percent. The main interest rate is at 3.75 percent in the eurozone and 0.50 percent in Japan.
An increase in interest rates tends to attract foreign short-term deposits, thereby increasing demand for the domestic currencies and increasing their values on the foreign exchange market.
Analysts expect the Bank of England to increase British interest rates by a quarter-point to 5.50 percent in May and further still before the end of 2007 after official data published on Tuesday showed British annual inflation had surged to a decade-high above 3 percent in March.
John Lonski, chief economist at Moody’s Investors Service, said the Group of Seven finance ministers appeared to suggest last weekend they would do little to stem big currency movements.
The G7 “gave the impression that finance ministers were tacitly aproving of any further slide of the dollar exchange rate,” Lonski said.
David Kotok at Cumberland Advisors said the weak dollar was a reflection of the status of the US as the “world’s biggest debtor nation” but that the low value of the currency would do little to spark the economy.
“Marginally, a cheaper currency helps exporters,” he said. “However, in the US, the bulk of the economy is services and therefore the total macroeconomic impact is relatively small compared with a goods-related economy.”Filed under: