The American Currency Continues to Sink

The dollar exchange rate weakened on global foreign exchange markets over the past week to a new record low against the euro, pressured by new economic indicators from the U.S. that signaled a reduction in key interest rates in the world’s largest economy.

The euro strengthened against the dollar by 0.6 percent to 1.4391 dollars over the past week, reaching a new record value of 1.4393 dollars during trading. The yen also strengthened against the dollar by 0.2 percent to 114.25 yen per dollar. Forecasts regarding the state of the U.S. economy were overshadowed by the announcement from brokerage firm Merrill Lynch about a write-down of asset values amounting to 7.9 billion dollars and a massive loss in the third quarter. The dollar was also pressured by a 23 percent drop in the number of new homes sold in the U.S. in September compared to the same month last year, and an unexpectedly strong decline was recorded in the number of existing homes sold. Furthermore, the greenback was hit by a new record high in oil prices above 92 dollars per barrel.

This cemented expectations that the Fed would lower key interest rates at the meeting scheduled for next week from the current level of 4.75 percent. “The dollar remains under pressure from multiple factors. The likelihood that the Fed will lower key interest rates next week is increasing, and speculation is growing that the reduction could go as far as half a percentage point. The consequences of the crisis in the financial sector also appear to be quite serious,” explains Russell Jones from RBC Capital Markets. Meanwhile, the Executive Director of the International Monetary Fund (IMF), Rodrigo Rato, warned of a “possible sharp decline” in the dollar exchange rate, which, according to him, could cause upheavals in the global economy. “There is a risk that a loss of confidence in dollar-denominated assets could trigger a sharp decline in the value of the greenback or conversely, that a sharp decline in the dollar’s value could undermine confidence in dollar-denominated assets,” said Rato at the conclusion of the annual meetings of the IMF and the World Bank.

On the other hand, the rise in prices in the stock markets renewed investors’ appetite for risk, which supported the euro and other high-yield currencies, analysts explain. Among the gainers was the British pound, which strengthened against the dollar by a modest 0.03 percent, trading at 2.052 dollars. The Swiss franc strengthened by 0.14 percent against the dollar, which stands at 1.162 francs. The euro also drew support from the forecast of Bundesbank President Axel Weber in an interview for the Sunday edition of a German daily that inflation in the eurozone could reach three percent by the end of the year, increasing the prospects for a renewed rise in key interest rates in the eurozone. In an interview with a newspaper, the President of the Eurozone, Luxembourg Prime Minister Jean-Claude Juncker, stated that he prefers a strong euro to a weak one, adding that the exchange rate of the single European currency is not yet at a level that would sound the alarm. (H)