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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Forex: Dollar Rises Versus Yen, Euro

The dollar rose to a three-month high against the yen and climbed versus the euro after Federal Reserve Chairman Ben S. Bernanke said economic risks have faded, spurring traders to boost wagers interest rates will rise. Bernanke said late yesterday that the central bank will ``strongly resist'' any waning of public confidence in stable prices. ``Strong'' economic fundamentals will translate to dollar strength, Treasury Secretary Henry Paulson said today in a Bloomberg Television interview in Washington.

"The Fed and the Treasury have signaled what they want: a stronger dollar,'' said Jeff Gladstein, global head of foreign- exchange trading at AIG Financial Products in Wilton, Connecticut. "There's potential for dollar appreciation.'' The dollar rose to 107.14 yen, the highest since Feb. 27, at 10:29 a.m. in New York, from 106.31 yesterday. Against the euro, the dollar climbed to $1.5509, from $1.5646. Japan's currency traded at 165.88 per euro from 166.33 yesterday.

Futures on the Chicago Board of Trade show a 55 percent chance the Fed will raise its 2 percent target rate for overnight lending between banks by at least a quarter point at its Aug. 5 meeting, compared with 9 percent the previous day. The contracts show a 95 percent chance the Fed will increase the rate by December, up from 67 percent odds a week ago.

The dollar has fallen 11 percent against the euro and 7.2 percent versus the yen since September, when the Fed began to lower borrowing costs from 5.25 percent.

China Talks

"The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,'' Bernanke said in a speech at a Boston Fed conference. "The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations.''

The Fed is "aware'' that the weak dollar boosts inflation, Dallas Fed President Richard Fisher said in response to questions after a speech at the Council on Foreign Relations in New York today.

Paulson repeated comments made yesterday that currency intervention is a tool for policy makers. He also urged China to loosen government controls on energy prices and the value of the country's currency.

The yuan traded near the highest level since a dollar peg was scrapped in 2005. The currency was little changed at 6.9255 per dollar in Shanghai, compared with 6.9230 on June 6, according to the China Foreign Exchange Trade System.
Central Bank Focus

Canada's dollar gained as the Bank of Canada unexpectedly kept interest rates unchanged at 3 percent because energy prices may push inflation past the top of its target band later this year. The loonie strengthened to C$1.0204 per U.S. dollar from C$1.0233 yesterday after touching 1.0323 before the rate announcement, the lowest in more than two months.

"The focus of the Fed and now the Bank of Canada has gone from preventing a second depression to all of a sudden inflation is an issue,'' said Win Thin, a currency strategist with Brown Brothers Harriman & Co. in New York. ``That's good for the dollar.''

The U.S. dollar climbed to 94.59 cents per Australian dollar, the highest since May 16, before trading at 94.75 cents. Against the New Zealand dollar, the U.S. currency gained to 75.49 cents, near the strongest in a month. The British pound slid to $1.9563 from $1.9751 after data showed U.K. house prices dropped in May.

Trade Deficit

A report today showed that the U.S. trade deficit widened in April as the surging cost of oil boosted imports to a record, overshadowing the biggest gain in exports in four years. The gap grew 7.8 percent to $60.9 billion the Commerce Department said.

The Standard & Poor's 500 Index fell 0.7 percent and the two-year U.S. Treasury yields rose 16 basis points to 2.87 percent. The yield advantage of a German two-year bund over a comparable Treasury has narrowed to 1.81 percent from 2.26 percent on June 6.

Finance ministers of the Group of Eight industrialized countries may consider joint action to deflate the price of oil and prop up the dollar at their meeting June 13-14 in Japan, said DBS Group Holdings Ltd. in a report to clients.

The last time the major industrialized countries intervened was on Sept. 22, 2000, when they bought the euro after it tumbled 27 percent from its 1999 debut. They last propped up the dollar in 1995, when it sank almost 20 percent in four months against the Japanese yen to a post-World War II low of 79.95 yen.

The greenback dropped 1.4 percent against the euro last week, the most since March, after Trichet said on June 5 that policy makers may raise borrowing costs in July to contain inflation and the U.S. Labor Department reported the next day that the jobless rate increased the most in May in more than two decades. Crude oil today climbed to $137.98 a barrel in New York. The price more than doubled in the past year.

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