Euro Hits Record vs Dollar as Fed Euphoria Fades

The dollar tumbled to a record low against the euro Wednesday as doubts grew about the long-term impact of recent Federal Reserve efforts to pump money into cash-starved credit markets.

AP

The greenback rallied a day ago after the Fed said it would lend primary dealers $200 billion in Treasury securities and accept a wider array of mortgage debt as collateral to ease tight credit conditions.

But those gains fizzled out on Wednesday as the euro rose above $1.55 for the first time in its nine-year history as investors wondered whether the Fed's plan would do enough to revive credit markets and boost a struggling U.S. economy.

"There was a knee-jerk reaction on Tuesday, but we're seeing today that these measures haven't really helped mitigate pressure in the financing markets," said Sophia Drossos, senior currency strategist at Morgan Stanley in New York.

Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto, said the dollar's turnaround Wednesday amounted to "a reality check" for markets.

"The Fed's move addresses short-term liquidity issues but doesn't address underlying credit concerns and the U.S. housing decline, which have not gone away," he said.

The euro hit a record peak of $1.5515, according to Reuters Dealing data, before easing slightly, but remaining up on the day.

At a news briefing in Germany, European Central Bank President Jean-Claude Trichet said for the second time this week that he was concerned about excessive exchange rate moves.

But his remarks did little to temper euro gains on the day.

The euro is up 6.2 percent against the dollar so far this year and 18 percent over the past 12 months.

Sterling hit a three-month peak at $2.0242 before easing. The dollar also surrendered most of the prior day's gains against the yen, not far from an eight-year low around 101.40 yen. Against the Swiss franc, the dollar was also weaker.

Traders said the euro also got a boost overnight when data showed euro zone industrial output rose by much more than expected in January, suggesting the ECB need not rush to lower interest rates.

And while investors have trimmed their bets for future Fed rate cuts, futures markets are still pricing in a 2-in-3 chance of a 75-basis-point easing this month alone.

The benchmark federal funds rate now stands at 3 percent, below the 4 percent euro zone refinancing rate.

Strategists at Brown Brothers Harriman in New York said recent strong euro zone data means the ECB may not need to cut rates until the third quarter of 2008.

Also weighing on the dollar was Jordan's announcement on Wednesday that it was set to reduce the greenback's share in official foreign exchange reserves.

China's commerce minister also said his country should hold its reserves in various currencies, raising more concern about dollar selling.

But Qatar's central bank governor said on Wednesday that there were no plans to change the country's exchange rate regime, which pegs the riyal to the dollar.

Analysts have speculated that some Middle East oil exporters such as Qatar or the United Arab Emirates could drop their currency pegs, which would put more pressure on the U.S. currency.

The dollar pegs make it harder for these countries to fight rising inflation at a time when record oil prices are bringing massive cash inflows into their economies.

A collective move to revalue their currencies "would be more than a symbolic blow to the dollar's currency reserve status," CMC Markets analyst Ashraf Laidi wrote in a research note.

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