Tuesday, November 27, 2007

Dollar plumbs new low versus euro

The US dollar slid to a new record low against the euro, as investors bet that the Federal Reserve would cut interest rates to help the economy this week.

The dollar hit a record low against the euro in early Monday trading at $1.4438 - before pulling back to $1.4423 by late trade in New York.

Lower interest rates can weaken a currency as investors move funds to assets that enjoy a higher return.

The dollar's slide helped drive oil prices to a new record above $93.

It also contributed to gold prices rallying to a 28-year high.

The US central bank, the Federal Reserve, is widely expected to cut interest rates by at least a quarter of a percentage point to 4.5% on Wednesday to limit economic damage from the housing market downturn.

Dollar 'heading south'

The dollar has been sliding since the Federal Reserve slashed rates from 5.25% to 4.75% in September in a bid to boost confidence in the world's largest economy.

"Regardless of the size of the cut anticipated by the market, all roads would appear to point south for the US dollar," said Neil Mellor, currency strategist at Bank of New York.

The euro was not the only currency to benefit from the dollar's woes. The Australian and Canadian dollars also hit their strongest levels in over two decades against the US currency.

Meanwhile, the pound hit $2.0627 before falling back slightly to $2.0591.

At the heart of the dollar's decline have been problems in the US housing market, caused by the Fed increasing interest rates in order to slow accelerating inflation.

As a result of the higher borrowing costs, an increasing number of borrowers have defaulted on loans, especially in the sub-prime mortgage market, which specialises in lending to people with poor credit histories.

This, in turn, has spread to global credit markets, as many of the sub-prime mortgages were repackaged and sold on to European and UK banks as investment assets.

The Fed cut its main interest rate in September to ease the pressure on consumers and reassure the global markets but last week's run of weak economic data raised expectations that further cuts were needed to rejuvenate the economy.

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