Dollar Sinks to Record Low vs Euro

Associated Press

The dollar sank to a new low against the euro after the chairman of the Federal Reserve Bank said Wednesday that the U.S. would encounter more sluggish economic activity in the coming weeks and months.

"The economic situation has become distinctly less favorable" since the summer, the Fed chief told the House Financial Services Committee, a sign markets took to be evidence of yet more interest rate cuts by the U.S. central bank which pushed the euro higher.

Lower interest rates can jump-start a nation's economy, but may weigh on its currency as traders transfer funds to countries where they can earn higher returns.

Shortly after his testimony, the euro surged to a record $1.5105 before falling back slightly.

The surging euro makes it more expensive for Americans visiting Europe, but makes U.S. shopping more appealing to Europeans.

Since Bernanke's last such assessment last summer, the housing slump has worsened, credit problems have intensified and the job market has deteriorated. Bernanke said that the confluence of these factors has turned people and businesses alike toward a more cautious attitude toward spending and investment.

This, he said, has further weakened the economy.

That is in contrast to Europe where, despite the roaring euro, growth is still on track, albeit slightly slower, and markets are optimistic that should the U.S. go into recession, the continent would be able to weather any such slowdowns.

The European Central Bank, which has left its own rates unchanged since last summer, is expected to keep them at 4 percent when it meets next week.

"The U.S. economy is still in a weak period and we cannot estimate how long that is going to go on and the market is counting on the Fed lowering the interest rates even further and on the fact that the ECB is going to keep them where they are," Christoph Schmidt, an analyst with N.M. Fleischhacker Trading Bank in Frankfurt told AP Television News.

He said that the divergent interest rates were "good for the euro and bad for the dollar."

In other trading, the British pound soared as high as $1.9971 before falling back to $1.9895, up from $1.9862 late Tuesday. The dollar fell versus the Japanese yen as well.

Along with the rise in the British pound, which is nearing $2 again, the surging euro will not be kind to Americans visiting Europe -- they will have to pay more for hotel rooms in Rome, entrance fees at the Louvre and chocolates in Belgium.

On the other hand, the stronger euro makes shopping trips to the U.S. more appealing to Europeans.

A higher euro also makes goods from the euro-zone more expensive for customers abroad, or cuts into manufacturers' profits if they try to keep the U.S. dollar price of products constant.

In Paris, France's budget minister Eric Woerth said that the "very high" euro was "a handicap for our exports."

In Germany, the record level is not expected to have any lasting negative effect on the country's economy, the chief economist of Germany's Chambers of Commerce, said.

"We can't yet speak of a threshold of pain for German exporters," Volker Treier told Dow Jones Newswires. The levels are a "currently rather temporary deflection" which aren't yet hurting Germany's economy.

Howard Archer, the chief British and European economist for Global Insight, said the euro's strength is not likely to weaken anytime soon, given that any "worsening in U.S. interest-rate differentials dilutes a key support for the dollar."

He also said that weaker growth prospects in the U.S., coupled with its deficit will "exert a significant downward influence" in the long term and cause some countries to shift more of their reserves from dollars to other currencies, including the euro.

"In addition, there is the very real possibility that several countries could switch a proportion of their foreign currency reserves out of U.S. dollars over time," he said.

The euro's latest march upward was buoyed by a string of disappointing economic reports out of the U.S. on Tuesday, including the New York-based Conference Board's Consumer Confidence Index, which fell to 75 in February from 87.3 in January, its lowest level since February 2003.

Meanwhile, the U.S. Labor Department reported that wholesale inflation rose by 1 percent in January -- more than analysts estimated -- on rising oil and food costs. Finally, Standard & Poor's reported that U.S. home prices fell 8.9 percent in the last three months of 2007 from a year earlier, its sharpest drop ever.

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