Dollar drops to fresh record low against euro

Friday, September 28, 2007

NEW YORK - The U.S. dollar dropped to a record low against the euro for a sixth consecutive session Thursday, sagging under expectations of a U.S. Federal Reserve rate cut next month.

The dollar has skidded to new lows against the European currency since the Fed last week cut interest rates by a larger-than-expected half percentage point.

The fresh low on Thursday came as market expectations build for another rate cut by the Fed amid more signs the U.S. economy is in a funk. And some think the greenback is likely to remain in a swoon until the economy stops weakening.

Journal Star news services

Thursday's disappointing economic data included a sharp drop in new homes sales for August. It followed other discouraging reports released this week that could prompt the central bank to further cut rates when it meets next month.

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

With so many warnings signs of a weakening economy, the dollar will be hard-pressed to eke out a rebound, said Michael Woolfolk, senior currency strategist at the Bank of New York.

"We're going to have to live with a sagging dollar in the foreseeable future, until the U.S. economy gets back on its feet," he said.

The euro rose as high as $1.4189 Thursday, breaking its previous record of $1.4162 from early Wednesday. It later retreated to $1.4160 in late New York trading, up from $1.4136 late Wednesday.

The Commerce Department reported Thursday that sales of new homes tumbled 8.3 percent in August to the lowest level in seven years, a stark sign that the credit crisis, triggered by bad U.S. mortgages, is aggravating an already painful housing slump.

In a second report, the government said that the economy grew at a 3.8 percent annual rate in the April-to-June quarter, the strongest showing in just over a year - but below a previous estimate of 4 percent.

The dollar recovered slightly Thursday on a report showing that fewer people signed up for unemployment benefits last week, raising hopes that recent weakness in the labor market could relent. Jobless claims fell 15,000 to 298,000 in the week ended Sept. 22 - the lowest level since May.

The American currency's slump has been welcome news for some, including manufacturers who are eager to see American exports become more competitive, Woolfolk said. While it also spells rising prices for imports and diminished spending power for American tourists overseas, the dollar's weakness could encourage U.S. vacationers to spend their money stateside, he said.

The Treasury Department remains largely unconcerned about the dollar's largely gradual decline, and is unlikely to intervene absent a major market shake up, said David Solin, a partner at Foreign Exchange Analytics in Essex, Conn.

"There hasn't been any dislocation in financial markets caused by the weaker dollar," he said.

In other trading Thursday, the dollar hovered near parity with Canada's currency, buying 1.0013 Canadian dollars, down from 1.0056 late Wednesday. The Canadian dollar broke even with the U.S. dollar last week for the first time since 1976, gaining on the Fed's rate cut, as well as soaring prices for Canada's plentiful oil and a strong economy north of the border.

The British pound rose to $2.0270 from $2.0155 in New York late Wednesday, while the dollar rose to 115.59 yen from 115.43 yen. The U.S. currency climbed to 1.1724 Swiss francs from 1.1699.