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Last Updated: Wednesday, 12 September 2007, 20:43 GMT 21:43 UK
Dollar at record low against euro
Woman holding dollar bills and euro notes
Analysts are predicting that the euro will be on top for some time
The US dollar has fallen to a record low against the euro as investors bet that the Federal Reserve will cut interest rates to help the economy.

At its nadir in European trading, it took $1.3914 to buy a euro, passing the last record of $1.3852 set on 24 July.

Many analysts are predicting that the Fed will cut interest rates next week as it looks to reassure markets and consumers amid a global credit crunch.

The dollar has weakened against the euro for six sessions in a row.

"The market's main focus remains on US economic fundamentals," said Tomohiro Iwata of Goldman Sachs.

He added that investors would be debating whether the Fed would cut rates by a quarter or a half of a percentage point, and what comments they might make following any move.

"Dollar weakness is still the story of the day," said David Jones of CMC Markets in London.

"Markets seem to be expecting a rate cut - I think half a percentage point - and that has been weighing on the dollar," he explained.

Rate spread

At the heart of the dollar's decline have been problems in the US housing market, caused by the Fed increasing interest rates in order to slow accelerating inflation.

As a result of the higher borrowing costs, an increasing number of borrowers have defaulted on loans, especially in the sub-prime mortgage market, which specialises in lending to people with poor or non-existent credit histories.

Graph showing dollar weakness
Today, one US dollar will buy you little more than 72 euro cents

This, in turn, has spread to global credit markets, as many of the sub-prime mortgages were repackaged and sold on to European and UK banks as investment assets.

Analysts are now speculating that the Fed will cut its main interest rate to ease the pressure on consumers, and help reassure the global markets that it is willing to intervene to ensure financial stability.

The Fed's main interest rate is currently at 5.25% and any cut would be the first in four years.

At the same time, there is speculation that European rates may rise as the region's economy grows by more than 2% this year.

On Tuesday, Jean-Claude Trichet, the president of the European Central Bank, said once again that the European economy was healthy.

However, he warned that market volatility could continue.

"We have seen a distinct possibility that the ongoing deterioration of credit worthiness of borrowers in the US sub-prime mortgage market could be a trigger for a more broad-based market correction," he said.


SEE ALSO
Yuan hits new high versus dollar
25 Jul 07 |  Business
European economy 'sound' - Trichet
11 Sep 07 |  Business
Dollar under continuing pressure
12 Jul 07 |  Business



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