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Tuesday, July 15, 2008

Forex - Dollar hits record low vs euro

The dollar briefly plunged to a record low against the euro as concerns mounted over the U.S. mortgage market and its impact on the wider economy. The euro jumped to an all-time high of $1.6038 as confidence on financial markets continued to plummet after the U.S. government on Sunday announced plans to bail out mortgage lenders Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ).

Investors are nervous that a Federal Reserve bail-out could add billions of dollars to the U.S. national debt, and lower the country's credit rating. 'Traders continue to fall out of favour with the dollar, looking for safer currencies instead,' said CMC Markets analyst James Hughes.

'Sunday's announcement by the Fed regarding its mortgage bail-out plan for Fannie Mae and Freddie Mac remains somewhat derided in the market -- it's apparently done little more than underline the perilous state of the U.S. economy,' he added.

The market jitters drove the euro higher despite a drop in the German ZEW institute's economic expectations index for July to a record low, while the pound breached the $2.00 mark. In addition, the yen rose to highs not seen in more than a month, even though the Bank of Japan has stressed the need of maintaining a neutral stance on interest rates amid increased uncertainties.

The BoJ, as expected, maintained its overnight call rate target unchanged at 0.5 percent for the 20th meeting running. Attention will now turn to the release of U.S. retail sales and the producer price index, and Federal Reserve chairman Ben Bernanke's semi-annual testimony to the Senate Banking Committee.

'Bernanke might provide some conciliatory words to provide support to the market, but given the current softness of the dollar, the data releases will also be crucial,' said an analyst at BNP Paribas (other-otc: BNPQY.PK - news - people ). Elsewhere, the pound remained well bid against the dollar, briefly hitting a three-and-a-half month high following stronger-than-expected CPI inflation data.

Official figures showed the key annual CPI rate jumping to 3.8 percent in June from 3.3 percent in May, beating forecasts for a more moderate rise to 3.6. 'The punchy headline number is likely to ensure that the pound remains well bid for now,' said Daragh Maher, senior forex strategist at Calyon.

The data has kept in place expectations that the Bank of England is unlikely to cut interest rates before the end of the year while inflation remains well above its 2.0 percent target.

'Inertia appears the most likely monetary policy stance for now,' said Maher.

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