Dollar Falls vs. Euro on Glum U.S. Factory Data

Dollar and Euro
Dollar and Euro

The euro headed higher against the U.S. dollar Thursday, after orders to U.S. factories fell by their biggest amount in seven months and the European Central Bank agreed to keep interest rates steady at 4 percent.

The 13-nation euro rose to $1.4135 in late-afternoon European trading, up from the $1.4108 it bought late Wednesday in New York -- and still more than 1 U.S. cent off its all-time high of $1.4284 set Monday.

The U.S. Commerce Department said that factory orders dropped by 3.3 percent in August, worse than the 2.8 percent decline that had been expected, and its biggest drop in seven months.

The euro was also helped, partially, after the ECB meeting in Vienna, Austria, left its benchmark rate unchanged despite calls by some European political and business leaders for a rate cut to stem the euro's recent gains.

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

In Berlin, Ludwig Georg Braun, president of the German Chamber of Commerce, said that growth in Europe's biggest economy in 2008 would be just more than 2 percent, down from 2.5 percent, a dip he blamed on the strong euro.

"If the dollar keeps moving in its current direction, that could cost us 0.3 percentage point of growth next year," he said. The group, however, left unchanged its growth forecast of 2.8 percent for 2007.

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

While it makes U.S. exports cheaper, it cuts the spending power of Americans visiting or working in Europe.

French President Nicolas Sarkozy has called for the ECB to do more to dampen the euro's rise.

The British pound gained to $2.0392 from $2.0321 Wednesday after the Bank of England agreed to keep its interest rate steady at 5.75 percent, a move most analysts had predicted. The bank is looking for more time to assess the impact of the credit squeeze on consumer and economic confidence.

The dollar weakened to purchase 116.51 Japanese yen from 116.70 in New York.

The dollar's string of record lows recently began after the Fed cut rates last month by a larger-than-expected half percentage point to 4.75 percent.

"There's still consensus that we'll see at least one more rate cut from the Fed before the year end and this has likely been fully priced in now," said CMC Markets analyst James Hughes. "But assuming there are no disasters with the non-farm payrolls (Friday) then there may be scope to ensure we don't see a return to the recent dollar lows again in the near term."