Euro soars to another new record

The euro soared to another record high against the sagging dollar on Wednesday, climbing above $1,47 for the first time, while the British pound reached $2,10.

One day before the European Central Bank (ECB) and the Bank of England decide on interest rates, the euro gained more than one US cent amid speculation that China may shift more of its foreign-currency stockpiles away from the dollar.

The 13-nation euro hit $1,4730 in afternoon European trading before slipping back to $1,4682—still well above the $1,4554 it bought in New York late on Tuesday.

The euro was undeterred after the US Labour Department reported that productivity jumped at an annual rate of 4,9% in the July-September period, double the 2,2% rise it posted in the second quarter.

Britain’s pound, meanwhile, rose to $2,1071 before slipping back to $2,1054, above its level of $2,0868 late on Tuesday. The pound is at its highest point against the dollar since May 1981, said James Hughes, an analyst at CMC Markets in London.

But he said the currency’s rally was “being driven by dollar weakness as opposed to pound strength”.

The dollar plunged in Asia after a report that a senior Chinese political figure said the nation should diversify its $1,43-trillion foreign-exchange reserves into the euro and other strong currencies.

But analysts said the comments showed the power of rumour on jittery markets.

“Currency players are not letting the facts get in the way of a good story today,” Marc Chandler, chief foreign-exchange strategist at Brown Brothers Harriman, wrote in a commentary on the investment website RealMoney.com.

Although the Chinese official, Cheng Siwei, has previously “offered rogue comments that did not reflect policy or the thinking of senior officials”, his comments were enough to send the dollar plummeting, said Chandler, adding he doubted the Chinese planned to diversify.

“It shows how vulnerable the market is,” said Commerzbank analyst Michael Schubert, adding that the euro and pound were also bouncing higher ahead of the central bank meetings. “Everyone is speculating on what [ECB president Jean-Claude] Trichet will say,” Schubert said.

Analysts are all but certain that the ECB will keep rates unchanged when it meets on Thursday, but will be watching closely for signals on its future course.
The Bank of England also is expected to leave rates untouched.

The dollar has been suffering from speculation that the Federal Reserve, which has cut its benchmark rate twice, may keep doing do even as its European counterparts hold or raise their rates.

Although lower interest rates can jump-start an economy, they can also weaken a currency as investors transfer funds to countries where they can earn higher returns.

The dollar has fallen to a nearly three-year low against the Swiss franc, and its woes aren’t confined to Europe: It has dropped almost 20% this year against the Canadian dollar, which reached parity with the US dollar on September 20 for the first time since 1976.

It is also at extreme lows against the Australian dollar and at an all-time low against the Chinese yuan. The dollar fell again on Wednesday against the Japanese currency, sliding to 113,29 yen from 114,57 yen.

A weaker dollar makes vacations overseas more expensive for US travellers and can make foreign companies choose between raising prices or cutting profitability on goods sold in the US. But it helps boost US corporations’ profits by making their exports more competitive abroad, and makes US vacations more affordable for Europeans.

The euro—introduced on financial markets in 1999—has risen from a low of 82 US cents in October 2000 mainly because of concerns over the enormous US trade and budget deficits and, now, the subprime crisis. It has also increasingly gained acceptance as a foreign-currency reserve in the coffers of companies and governments from China to the Middle East.—Sapa-AP

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