Dollar Exchange Rate Dives to New Depths

The exchange rate of the American currency plunged last week to new depths against the major international currencies as expectations grow in the financial markets that the U.S. central bank, the Fed, will lower interest rates again.

The dollar slid on Friday to a new record low level against the euro of $1.4278 per euro. The week ended at $1.4266 per euro, or 1.3 percent lower than the previous week. In September, the single European currency strengthened against the dollar by as much as four percent. The greenback fell in the past week by 1.3 percent against the British pound, which stands at $2.047. The Swiss franc slightly strengthened, closing trading on Friday at 1.1636 francs per dollar. Against the yen, the dollar weakened by 0.6 percent, to 115.8 yen. At the same time, the single European currency reached its highest level against the yen in the past seven weeks at 163.79 yen per euro.

The greenback was affected by the release of consumer confidence data in the U.S., which slipped in September to the lowest level in the past two years at 99.8 points compared to the revised August figure of 105.6 points due to heightened fears regarding jobs and turmoil in the financial markets. The situation in the U.S. real estate market has also worsened, with existing home sales in August recording the lowest annual growth rate in the past five years. Furthermore, new home sales decreased in that month by 8.3 percent, to about 795,000 homes. Their prices also fell, at the fastest rate in the last 37 years.

These fears fueled expectations that the U.S. central bank, the Fed, might lower key interest rates again next month, further diminishing the attractiveness of dollar-denominated assets. In September, the Fed lowered the key interest rate by half a percentage point to 4.75 percent. Market participants acknowledge that the euro’s strengthening against the dollar by as much as four percent in September may have been excessive, but they predict that the trend of dollar weakening against the single European currency is likely to continue in the short term.

“I still believe that the trend of dollar weakening could continue. There is no doubt that economic indicators from the U.S. are not helping the greenback much, and if expectations for further cuts in key interest rates strengthen due to weak indicators, the dollar will remain under pressure,” concludes Mitul Kotecha from Calyon.

The euro, on the other hand, is expected by traders to continue strengthening, despite heightened fears that the European economy could also be affected by problems in the U.S. subprime mortgage market. Therefore, the single European currency reacted only slightly to the decline in the German Ifo business confidence index in September to 104.2 points compared to August’s 105.8 points. Thus, the index did not meet analysts’ expectations, who anticipated a slightly higher value, namely 105 points. (H)