Dollar hits bottom, falls again

THE US dollar fell sharply yesterday, reaching a record low against the euro and capping a dramatic week for global financial markets that was marked by interest rate cuts, bank bailouts and skyrocketing oil prices.

By Khaleej Times Report

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Published: Sat 22 Sep 2007, 2:12 PM

Last updated: Sat 4 Apr 2015, 11:43 PM

The level of the dollar — often regarded as a barometer of the US economy's health — dropped to $1.4120 against the euro during business hours in Asia, reaching an all-time low for a second consecutive day.

It also slipped against a number of other major currencies on speculation that the US Federal Reserve would keep cutting interest rates as the world's largest economy weakens.

Sentiment soured for the dollar after Ben Bernanke, chairman of the Federal Reserve, stoked speculation that he might continue to lower rates following this week's aggressive trim of half a percentage point. Bernanke said on Thursday that the sell-off in credit markets could make the housing recession more severe.

The dollar recovered somewhat during European trading, but investors believe that the currency will continue to lose ground, as it has for much of the past six years.

"The dollar weakness will drag on," said Simon Derrick, chief currency strategist at Bank of New York Mellon in London. "The crisis is not over and the Fed is likely to cut rates further."

Officials across the globe, including the US Treasury secretary, Henry Paulson Jr., have also been warning that it will take some time for the dust to clear from the fallout of the tanking US real estate market.

"The crisis isn't over," Peter Costello, the Australian treasurer, said yesterday. "It still has some way to go."

Banks as far away from the United States as Australia have taken a hit from the drying up of easy money that they need to do business.

This week, depositors made a run on Northern Rock to withdraw their savings after the British bank revealed it was at risk of failing and needed a bailout from the Bank of England.

The drama highlighted the severity of the shock waves stemming from rising defaults in US subprime home mortgages: Northern Rock was not exposed to the subprime market but it did get tangled up in the ensuing credit crunch.

Among other superlatives that have gripped financial markets this week, the price of oil rose to a record of just under $84 a barrel. The price could further threaten already slowing global growth. Gold also hit a 28-year high yesterday as the dollar's slide prompted speculative investors to seek a safe haven.

The week also exposed some of the beneficiaries of the market turmoil. On Thursday, in a series of multibillion dollar deals, Dubai, Qatar and Abu Dhabi reached out to acquire significant stakes in three stock markets and a US private equity firm, illustrating an increasing appetite for investing their growing wealth in high-quality assets abroad as oil prices hit records.

Volatility in the markets is stirring debate among policy makers. President Nicolas Sarkozy of France pressed Jean-Claude Trichet, president of the European Central Bank, to lower interest rates.

"When the US central bank lowers its rates, everything picks up; when we don't lower ours, we go down," Sarkozy said on Thursday in an interview with the television stations TF1 and France 2. "I'm telling Mr Trichet, 'Look at what others are doing’.”

Pressure is also growing on China, which European and US officials say is keeping the yuan at an artificially low level to keep its exports strong.

Finance Minister Christine Lagarde of France said yesterday in Beijing that she was concerned about the impact not only of the euro-dollar rate but also the euro's rate against the Chinese yuan and the Japanese yen.

She said she had raised the issue of unbalanced exchange rates both with Finance Minister Xie Xuren and Premier Wen Jiabao of China.

She said there was a need for all countries affected by currency imbalances to think about how to engineer greater stability in financial markets.

The yuan has appreciated by a total of about 10 per cent against the dollar since July 2005, when it was revalued and decoupled from a peg against the dollar to float in a managed range.

But it has weakened against the euro by about 4.7 per cent. Financial markets have also been spooked by comments by the former chairman of the Federal Reserve, Alan Greenspan, who gave numerous interviews this week to promote his book.

Greenspan said the odds of a recession remain "somewhat more" than one in three even after this week's cut in U.S. interest rates. "Remember, we still have a problem out there, which is a large overhang of unsold newly constructed homes," Greenspan said.

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