Dollar hits record low against euro

The dollar plunged to a record low against the euro this week after the Federal Reserve surprised investors with an aggressive interest rate cut.
The Fed cut its main interest rate by 50 basis points to 4.75 per cent on Tuesday and also cut the discount rate – at which it lends directly to banks – by 50bp to 5.25 per cent.
The Fed had been expected to deliver a 25bp cut. Analysts said the size of the move intensified fears over the state of the US economy, heightening expectations that the Fed would deliver a series of cuts in the months ahead.

Moreover, analysts said the subsequent rally in equity markets and risk appetite resulted in less safe haven demand for the dollar from US investors repatriating funds from overseas.

Meanwhile, there were signs that foreign investors were beginning to shun US securities as the Treasury TICS data revealed a collapse in portfolio capital inflows to the US in July as well as a growing reliance on short-term inflows.

The dollar fell through the $1.40 level against the euro for the first time, hitting a record low of $1.4120 on Friday. Over the week, the dollar lost 1.5 per cent against the single currency.

The euro’s move through the psychologically important $1.40 level – seen as a pain barrier for eurozone exporters – sparked a chorus of calls from European politicians urging the European Central Bank to abandon its monetary tightening bias.

Analysts said that while Jean-Claude Trichet, ECB president, might not share the view that eurozone interest rates should be cut, he was not unconcerned about the euro’s rise.

Last weekend, Mr Trichet noted the US had said a strong dollar was in its interests, while Japanese officials have said the yen should reflect improving economic fundamentals.

“The repetition of these pointed comments continues to make us wonder whether Mr Trichet may want to spearhead a fresh European effort to tackle currency misalignment at the next meeting of G7 finance ministers and central bankers in October,” said Simon Derrick at Bank of New York Mellon.

The dollar also lost ground elsewhere, falling 1.3 per cent to SFr1.1730 against the Swiss franc over the week, dropping 0.6 per cent to $2.0185 against the pound and tumbling 3.5 per cent to a low of C$0.9939 against the Canadian dollar, the first time the loonie has achieved parity with the dollar since 1976.

The dollar did rise against the yen, however, edging 0.1 per cent higher to Y115.40 as rallying equity markets boosted risk appetite and demand for carry trades.
Over the week, the yen fell 1.5 per cent to Y162.60 against the euro, dropped 3 per cent to Y99.90 against the Australian dollar and tumbled 4.6 per cent to Y85.87 against the New Zealand dollar.

The yen also fell 0.7 per cent to Y233.15 against sterling.

However, the pound came under pressure against the euro as the Bank of England was forced into a U-turn in the face of the problems surrounding Northern Rock, the beleaguered UK mortgage lender. The Bank, which had previously shown reluctance to ease tight liquidity money market conditions, made £10bn of three-month money available to participants.

Analysts said the move heightened speculation that the next move in UK interest rates would be lower.

The pound fell to £0.7020 against the euro on Friday, its lowest level in more than two and a half years, before pulling back to stand at £0.6975, 0.8 per cent down on the week.