Dollar Holds Near 14-Month Low vs Euro

The dollar hovered near a 14-month low against the euro Monday as investors bet the Federal Reserve will hold U.S. interest rates near zero well into next year.

The euro traded within half a cent of $1.50, a level not seen since August 2008. Analysts said investors would be on alert for any comments about excessive euro strength from a meeting of euro zone finance ministers later in the day.

Though the U.S. economy is expected to have exited recession in the third quarter, investors fear rising unemployment will keep the Fed from lifting interest rates quickly. That would diminish the dollar's appeal and encourage investors to buy higher-yielding, higher-risk currencies and assets instead.

"The trend clearly is for a weaker dollar due to a lack of interest rate support," said Marcus Hettinger, global currency strategist at Credit Suisse in Zurich.

High-yielding currencies such as the Australian and New Zealand dollars hovered near multimonth highs against the greenback while U.S. earnings optimism lifted Wall Street.

The euro rose as high as $1.4959 and was last up at near $1.49. Analysts said a test of $1.50 was still likely in the days ahead.

AP

"The global growth story is getting better. The U.S. economy has improved, so everyone is selling dollars and buying emerging markets. The data justifies the risk," said Sebastien Galy, senior currency strategist at BNP Paribas in New York.

Traders were on the lookout for possible remarks on euro strength and dollar weakness at a gathering of euro zone finance officials in Luxembourg, although analysts said the group was unlikely to significantly talk down the euro.

On a trade-weighed basis, the euro jumped to 118.82 on Friday, close to historic highs, though it eased a bit to about 117 Monday. The euro has appreciated nearly 7 percent against the dollar this year.

Yen, Aussie Gain; Euro Struggles

The dollar was down at about 90 yen and slipped lower to around 1.01 Swiss francs . The Australian dollar rose to around $0.92, near a 14-month peak, after a central bank official said a return to normal monetary policy was appropriate.

The Reserve Bank of Australia raised rates to 3.25 percent this month, the first major central bank to hike rates since the global economic crisis began.

Sterling slipped to near $1.63 after a Bank of England official said the central bank should continue its asset-buying program because the economy has yet to recover.

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The New York Fed added to dollar woes Monday when it said reverse repo tests did not mean it was ready to use this tool to drain money from the banking system.

In a reverse repo, the Fed sells assets such as Treasuries for cash with an agreement to buy them back later, effectively tightening policy by draining money from the banking system. The Fed has also been buying assets such as mortgage-backed debt, and some analysts said it could lend the dollar modest support by winding down those purchases while still holding rates near zero.

"Such a move would steepen the yield curve and make the dollar more attractive versus the yen on an interest rate differential basis, possibly pushing the pair to 95 yen," said Boris Schlossberg, research director at GFT Forex in New York.

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