Dollar Drops vs. Euro as Rates Seen Staying Low

The dollar hit a one-month low against sterling Wednesday and the euro broke above $1.50 for the first time in 14 months as expectations that U.S. interest rates will remain low weighed on the greenback.

Sterling rose after minutes from a Bank of England meeting suggested officials are not ready to expand an emergency asset buying program and had "differences of view" on inflation.

Analysts said that suggests central banks outside the United States are considering winding down programs that have flooded their economies with money. If the U.S. Federal Reserve doesn't follow suit and holds interest rates at record lows, that would diminish investor desire to hold dollars.

Sterling rose more than 1 percent to around $1.66, and heavy dollar-selling coupled with a rally on Wall Street helped push the euro to $1.5017. It was last up at about $1.50.

"Not everyone is serious about raising rates yet, but the fact that the BoE may not add any more money to the system has the market looking for the same type of rhetoric from the Fed," said Boris Schlossberg, head of FX research at GFT Forex.

"Part of the reason the dollar is hobbling along, trying to keep its footing, is that people think the Fed is handcuffed until the labor market stops contracting," he said.

Late Tuesday, San Francisco Federal Reserve President Janet Yellen said the time for monetary tightening in the U.S. was still some way off.

The Fed has extended more than $2 trillion of credit to the financial system, and Chairman Ben Bernanke has said interest rates should remain low for some time. That makes the dollar less attractive to investors than higher-yielding currencies and assets more closely correlated with economic recovery.

Against a basket of currencies, the dollar hit a fresh 14-month low near 75. Whether the euro, the biggest component of the basket, pushes higher from here depends to some extent on U.S. stocks and crude oil futures, which broke above $80 a barrel on Wednesday.

"Before we say the floodgates have opened, we have to see whether gains in the S&P 500 and oil are going to accelerate as quickly," said Andrew Chaveriat, technical analyst at BNP Paribas in New York. A euro move to around $1.5070 could spark profit-taking and a temporary retreat, he added.

The dollar, however, was up at near 91 yen.

BoE Takes Foot off the Gas

BoE officials voted unanimously to continue a 175 billion pound quantitative easing program, minutes showed, surprising those who feared the bank might expand its size and scope.

Policymakers differed on the inflation outlook, which suggested some were wary of adding more money to the system.

"The minutes shifted the balance of risks in favor of a pause in asset purchases in November, which the pound has reacted to," said Lee Hardman, strategist at Bank of Tokyo-Mitsubishi UFJ in London.

The New Zealand dollar rose to about $0.75, near a 15-month high, after central bank chief Alan Bollard said currency strength was not necessarily an obstacle to higher interest rates .

For Investors:

• Global Markets Overview
• Commodities Prices Roundup
• Funds and ETFs Quotes
• Where's the US Dollar Today?

Earlier this month, Australia became the first developed country to raise rates since the global crisis began, pushing the Australian dollar to a 14-month high this week.

In China, the State Council said economic recovery had been "consolidated," a shift in rhetoric that some analysts say may be the first hint that officials are at least thinking about how to normalize loose monetary and fiscal polices.

Copyright 2009 Reuters. Click for restrictions.