The dollar plunged to a record low against the euro on Wednesday as an expected interest-rate cut next week from the Federal Reserve has dampened the United States currency’s appeal.
The dollar also dropped to a fresh 15-year trough against a basket of currencies, as continued problems in the global credit market and weak US jobs data led investors to anticipate a half percentage point easing in the federal funds rate, currently at 5,25%.
”There is dollar pessimism in the market,” said Gavin Friend, chief currency strategist at Commerzbank in London.
”Everybody is counting down to September 18 when the Fed is expected to cut rates. Positioning out there is not that heavy and there is still room to build long euros and long sterling [positions] against the dollar,” he added.
The euro rose as high as $1,3878, according to Reuters data, the highest since the launch of the single European currency in 1999. It last traded at $1,3859, flat on the day.
Late on Tuesday, short-term interest rate futures signalled a perceived 67% chance of a 50-basis point cut in the fed funds target rate at the US central bank’s September 18 policy-setting meeting.
However, even if the Fed cut by only a quarter percentage point, the outlook for the dollar remained negative, said Niels From, currency strategist at Dresdner Kleinwort in Frankfurt.
”If the Fed only cuts by 25 basis points the market will think that it is not reacting strongly enough, stoking fears that the economy is heading for recession, which is also negative for the greenback,” he added.
The yen, meanwhile, initially slipped as Japanese Prime Minister Shinzo Abe resigned, but regained ground as the euro hit a record high against the dollar.
With investors still worried about turmoil in credit markets stemming from problems in the US subprime mortgage sector, Abe’s resignation alone was not likely to play a crucial role in shifting market focus to the yen, traders said.
Comments add to dollar weakness
Remarks by European Central Bank (ECB) President Jean-Claude Trichet on Tuesday saying the ECB’s monetary policy remained accommodative also added support to the euro.
By contrast, US Treasury Secretary Henry Paulson’s prediction that market turmoil would last longer than the 1998 financial crisis put the dollar under additional pressure.
”Paulson made clear that the current crisis has very little to do with central banks running too tight liquidity conditions,” said BNP Paribas in a client note.
”Hence, the problem of wide credit spreads and disfunctioning money markets will not be solved by adding central bank liquidity.”
In Europe, euro zone industrial production rose more than expected in July, while wage growth picked up in the second quarter, but the single currency showed little reaction to the report. — Reuters