Dollar falls on slowing US growth, inflation concerns

Analysis

The dollar fell Tuesday to a record low against the euro and slumped against other major currencies, amid optimism about the economy in Europe and concerns about growth in the United States. 

In New York, the euro jumped more than 1 US cent to close at a record 1.3746 dollars. The greenback slipped against the Japanese currency to 121.78 yen, down from 123.4 yen on Monday. In Europe, the pound hit a 26-year high of 2.0231 dollars.

The euro's rise against the dollar follows concerns about the US economy, keyed by continuing weakness in the housing market along with falling productivity, the US trade deficit and renewed inflationary pressures. The common currency's previous record of 1.3682 dollars was set in April. Since then, economic data has continued to point to the 13- member eurozone remaining on a growth track and shaking off slowing US economic growth.

The rate-setting US Federal Reserve Board left its monetary policy unchanged last month with a benchmark interest rate of 5.25%. Meanwhile, the European Central Bank appeared to prepare the ground at its meeting last week to deliver another rate hike in September, which would lift the ECB's benchmark refinancing rate to 4.25%. This would be the ECB's ninth rate hike since the bank launched its current cycle of tighter monetary policy in December 2005. “The area is at the moment the only one of the major economic regions of the world where a rate rise is not expected,” said Carsten Fritsch, currency analyst with Commerzbank AG. At the same time, strong British retail sales data added to expectations that the Bank of England will continue hiking rates, after announcing last week that it was raising rates in Europe's second biggest economy to 5.75%.

The ECB's signal last week that it was considering another rate increase in September after raising the cost of money by 25 basis points in June sent the euro to an all-time high against the Japanese currency of 167.38 yen. The euro's climb has also helped to rattle investors concerned about the impact of the currency's rise on the 13-member area's key export machine. The pan-European EuroStoxx 50 index closed Tuesday down 1.22%.

After making its debut on world forex markets at 1.18 dollars in January 1999, the euro dropped about 25% over the following 18 months or more, as concerns set in about the currency bloc's economic outlook and as Europe's political leaders battled to reach consensus on reform. The common currency hit a record low of 82.52 US cents in October 2000. Euro notes and coins were introduced in January 2002. (monstersandcritics.com)

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