AP
Dollar Sinks to New Low Against Euro
Thursday September 13, 9:51 am ET
By Matt Moore, AP Business Writer
Dollar Briefly Falls to Record Low Against Euro, but Rises Against Pound and Yen


FRANKFURT, Germany (AP) -- The dollar briefly sank to a record low against the euro on Thursday for a second successive day amid speculation that the U.S. central bank will cut interest rates amid turbulence in financial markets.

The euro rose to $1.3927, topping the record $1.3914 reached the previous day. It then settled back to $1.3887 in early afternoon European trading and was below the $1.3908 it bought late Wednesday in New York.

A higher euro makes goods from the 13-nation euro zone more expensive for customers elsewhere, and cuts into manufacturers' profits if they try to keep the dollar price of products constant. While it makes U.S. exports cheaper, it cuts the spending power of Americans visiting Europe.

The euro has benefited from healthy economic news in the euro zone and the European Central Bank's campaign of gradual interest rate increases.

However, its current strength is widely seen primarily as a result of problems afflicting the dollar.

The subprime mortgage crisis in the U.S. and signs of economic frailty, particularly weak August jobs data, have prompted speculation that the Federal Reserve will cut interest rates by as much as half a percentage point next week from the current 5.25 percent.

Howard Archer, the chief UK and European economist at Global Insight, said the record euro is not all bad news for European firms.

"Euro zone consumers could benefit from cheaper prices for some imported goods. There is also some good news for euro zone companies," he said.

"Given that oil, metals and many raw material prices are typically quoted in dollars, the strength of the euro against the dollar should dampen firms' input costs."

The price of oil was near record highs Thursday after a report showed U.S. crude inventories fell in the latest week, driving oil futures above $80 a barrel for the first time.

Some, however, point to the potential dangers of a strong euro to the economies of countries that use the currency -- including Germany, the world's largest exporter.

"In this situation, everything that has a disadvantageous effect on exports is a problem, and the rising euro is part of that," Peter Bofinger, a member of the German government's independent economic advisory panel, was quoted as telling the daily Berliner Zeitung.

"If the rate climbs further, politicians should think about supportive buying in favor of the dollar," he added, according to the report.

Along with the euro, the British pound also has been exceptionally strong against the dollar. The pound broke through $2 earlier this year for the first time in nearly 15 years, and has remained around that level.

But on Thursday, the pound fell to $2.0265, down from $2.0302 on Wednesday, while the dollar rose to 114.76 Japanese yen from 114.26 yen.

The euro's latest push forward has been helped by impressions that the European Central Bank has another interest rate increase in the pipeline before the end of the year -- an option that the bank left open when it left rates on hold at 4 percent last week.

Lower interest rates, used to jump-start the economy, can weaken a currency by giving investors lower returns on investments denominated in the currency. Higher rates, a tool to combat inflation, can strengthen a currency.

ECB governing council member Yves Mersch wrote in a report published Thursday that risks to euro zone price stability persist and promised that the bank will act "in a firm and timely manner" to counter these risks.

"The orientation of the ECB's monetary policy remains accommodative," said Mersch, the governor of Luxembourg's central bank -- adding that the ECB "may resume tightening," depending on the analysis of new data.

Associated Press writer Geir Moulson in Berlin contributed to this report.