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Dollar Soars on economy concerns PDF Print E-mail
Sunday, 10 August 2008

AP, NEW YORK -- The dollar soared Friday as concerns about the deteriorating euro zone economy gripped investors, who concluded European central banks are done with interest-rate increases. The dollar also gained from the sell-off in commodities.

In late morning trading in New York, the euro came off its lows to $1.5033 from $1.5328 late Thursday. Earlier in the day, it sank as low as $1.5004. It is the highest point for the dollar since late February, and a rapid recovery from July 15, when the euro hit a record against the dollar at $1.6038.

''There's a real capitulation under way,'' said David Gilmore, partner at Foreign Exchange Analytics in Essex, Conn. ''In 24 hours it's gone from $1.55 to $1.50, which is highly unusual. That changes your game plan for the marketplace.''

On Thursday, the European Central Bank and Bank of England left their key interest rates unchanged at 4.25 percent and 5 percent, respectively. ECB President Jean-Claude Trichet issued a warning on inflation and said economic growth figures for the second and third quarters of 2008 would be much weaker than in the early part of the year. He signaled that an interest-rate increase to counter inflation would probably not be forthcoming.

Higher interest rates can buck up a currency, as investors transfer assets where they can get better yields, while lower interest rates can weaken a currency.

The pound, meanwhile, recovered slightly to $1.9170 after earlier selling as low as $1.9145, its lowest point since November 2006. On Thursday, the pound sold for $1.9436. But the dollar leaped to 110.14 Japanese yen from 109.45 yen, its highest level since January.

''This is payback time for the European currencies against the dollar,'' said Ashraf Laidi, currency strategist at CMC Markets. ''These currencies have to retreat to better reflect the sharp deterioration in economic fundamentals in (the euro zone) region. This is not to say there's been an improvement in U.S. fundamentals.''

Earlier in the week, the Federal Reserve maintained the benchmark federal funds rate at 2 percent.

Comments by ECB President Jean-Claude Trichet after Thursday's decision ''confirmed that the window of opportunity for further rate hikes has been slammed shut by the cold blast of negative data releases that swept through the euro zone in the last few weeks,'' said Marco Annunziata, an economist at UniCredit in London.

Recent economic indicators from major euro zone economies such as Germany, France and Italy have painted a gloomy picture.

The ECB last month moved to cool inflation by raising borrowing costs for the first time in a year, by a quarter percentage point to 4.25 percent, while the Bank of England has left rates unchanged since April, when it reduced its benchmark figure by a quarter of a percentage point to 5 percent.

Crude oil futures, meanwhile, dropped below $116 a barrel, and oil-producing countries' currencies sold off.

''Lots of investors have been on high commodity prices and a low dollar, and those bets are getting destroyed,'' Gilmore said.

The Canadian dollar, which leapt higher last fall on the back of surging oil and other commodities, is back down again to 12-month lows against the U.S. dollar, while the Australian dollar is back to mid-January levels.

The dollar rose to 1.0670 Canadian dollars from 1.0517, and gained to a six-month high of 1.0814 Swiss francs from 1.0625 francs.

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