Archive for the ‘monetary policy’ Category

Ailing dollar falls to historic low against euro

November 21, 2007

NEW YORK (AFP) – The ailing US dollar tumbled to a historic low against the euro Tuesday as concerns mounted about US economic growth after the Federal Reserve trimmed back its growth projections, traders said.

Fears of slower economic growth, largely driven by a lingering housing slump and a related credit squeeze, have weighed heavily on the dollar in recent weeks.

Fears that overseas investors and countries, especially China which holds over a trillion dollars in foreign exchange reserves, could sell or convert their dollar holdings have also depressed the dollar.

The euro, which has rocketed in value against the dollar this year, soared as high as 1.4853 dollar. It was at 1.4836 dollars at 2200 GMT, compared with 1.4665 dollars late Monday.

The euro hits its highest level against the dollar since the single currency’s creation in 1999.

“When concerns over the economy grow, you turn to stable currencies — for example the dollar, but ultimately the dollar is going down so now you would buy the euro,” said Neil Mellor, a currency strategist at Bank of New York.

Falling interest rates have also depressed the dollar, the Fed cut borrowing costs in September and October in a bid to underpin economic momentum, as investors generally prefer to invest in countries where rates are rising or higher.

The central bank slashed its outlook for 2008 US economic growth Tuesday, citing weakness in housing and tighter credit conditions, and suggested policymakers are unsure about future interest rate cuts.

The central bank projected growth next year in a range of 1.8 to 2.5 percent down from a prior forecast of 2.5 to 2.75 percent.

“The US dollar posted its largest single-day loss in over a year, as speculation for future US Federal Reserve interest rate cut doomed the greenback to further drops,” said David Rodriguez, a currency analyst at Forex Capital Markets.

“Continued speculation that key oil producing countries may drop the dollar as their primary reserve currency has clearly hurt the dollar, while increasingly pessimistic forecasts for US economic growth and interest rates has likewise hurt confidence in the dollar,” Rodriguez said.

The dollar’s demise was hotly debated at an OPEC meeting this past weekend in Saudia Arabia as the oil producing cartel currently prices oil in dollars.

Fed chairman Ben Bernanke has said US growth is likely to cool in future months and economists say the housing downturn is unlikely to improve any time soon.

A government report showed a rebound in new home construction for October, but analysts said it home building will likely decline in future months, particularly as demand for building permits dropped last month.

The pound was quoted at 2.0669 dollars compared with 2.0497 late Monday.

In late US trade, the dollar stood at 1.1058 Swiss francs from 1.1149. The dollar edged up to 109.88 yen, against 109.74 yen a day earlier.