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Dollar Hits Another Low as Rate Cut Expected

Reuters
Friday, 28 Sep 2007 | 4:55 PM ET
Hundred Dollar
Bill Haber
Hundred Dollar

The dollar hit another new low Friday, as U.S. inflation data reinforced expectations that the Federal Reserve may cut interest rates again.

The 13-nation euro reached $1.4234 in late afternoon European trading -- exceeding its previous peak of $1.4189, reached Thursday.

It was the seventh trading day in a row on which the euro broke the record from the previous day. The euro had bought $1.4160 in New York late Thursday.

The euro spiked above $1.42 after the release of data showing that a key measure of inflation in the U.S. eased last month to the slowest pace in 3 1/2 years.

The 1.8 percent rise in core inflation over the past year, which excluded energy and food, was within the Fed's comfort zone for core price increases of between 1 percent and 2 percent, meaning they could cut again.

The data also showed that incomes rose by 0.3 percent last month, slightly lower than had been expected.

In other trading, the British pound rose to $2.0353 from $2.0270 in New York late Thursday.

The dollar was down to 115.21 Japanese yen from 115.59 yen.

The dollar has been sliding since the Fed last week cut interest rates by a larger-than-expected half percentage point. Since then, disappointing U.S. economic data have stoked expectations that another rate cut could follow.

Dollar Ripple Effects
The dollar is at historic lows versus other currencies, and strategists are still predicting more declines. Andrew Busch, BMO Capital Markets global FX strategist , and David Wyss, S&P economist, discuss the possible ripple effects.

Lower interest rates, used to jump-start an economy, can weaken a currency as investors transfer funds to countries where their deposits and fixed-income investments bring higher returns.

Higher interest rates are used to combat inflation. On Friday, the European Union's statistical agency estimated that inflation in the euro zone would hit 2.1 percent in September -- jumping from 1.7 percent in August, and putting inflation above the ECB's guideline of just under 2 percent.

That could lead market participants to expect that the ECB might go on raising interest rates instead of pausing amid market turmoil from the U.S. housing credit crisis.

Longer term, the U.S. has been running large trade and budget deficits for years -- factors that tend to undermine a country's currency in the long term, unless they are offset by foreigners willingness to invest their money in the United States.

Consequences of the dollar's fall include upward pressure on inflation from higher prices for imported food and goods, and less purchasing power for Americans traveling or living abroad. On the other hand, a cheaper dollar makes U.S. exporters' wares more competitive on a price basis overseas.