Dollar hits new record euro low

Trade and budget deficits are making the dollar blush

The dollar hit yet another record low against the euro in London on Tuesday on speculation Russia could increase its reserves of the single currency.

The US currency's new fall follows a sharp decline on Monday on worries about the size of the US trade gap.

Now, reports that Russia will shore up its reserves of euros at the expense of the dollar have tipped the currency back over the edge again.

The dollar hit $1.3105 against the euro before rallying in US trade to $1.3077.

But on Monday the dollar was trading at the $1.3039 level.

Currency strategists said they expect little overall change in market sentiment even if US economic data due on Wednesday is positive.

"The dollar doesn't care about short-term US economic fundamentals," said Sean Callow, at IDEAglobal in New York.

The dollar's trading very badly - it's like pushing a basketball underwater David Bloom, HSBC

Fears that the US wants to see its currency weaken to ease its massive current account deficit have been the driving force behind the dollar's recent decline.

Fuel was added to the fire last Friday after Federal Reserve chairman Alan Greenspan said the current account gap was unsustainable.

Fragile

Meanwhile, last weekend's meeting of the Group of 20 finance ministers failed to signal a policy response to the greenback's decline, triggering another sell-off.

Current euro/dollar exchange rates Q&A: Why the dollar declines

Sentiment towards the dollar remains fragile, and any whisper of bearish news can have a disproportionate impact.

"The fact that the downward movement has continued has shown the market's preference for selling the dollar," said Steve Barrow, currency analyst at Bear Stearns.

"As soon as the market is given an inch it tends to take a mile."

Despite briefly stabilising on Monday, the sell-off gathered pace again on Tuesday.

"The dollar's trading very badly - it's like pushing a basketball underwater," said David Bloom, HSBC economist.

"You push it down with your hands and say 'look, it's going down' - then it shoots up in your face."