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Last Updated: Tuesday, 6 November 2007, 20:15 GMT
Euro climbs to fresh dollar peak
Woman holding dollar bills and euro notes
A rise in eurozone rates would further support the euro's strength
The euro has hit a fresh high against the dollar, as negative views of the US economic outlook continue to take their toll on the US currency.

A steady sell-off of the dollar meant that one euro was worth $1.4571 at one point, while the pound hit $2.09 for the first time since the 1980s.

A steady stream of bad news coming from the US mortgage sector has sparked fears for the health of the economy.

These fears have prompted investors to sell dollars and buy euros or pounds.

The Bank of England is widely tipped to leave interest rates on hold at 5.75% when it meets later this week, while the recovery in the eurozone economy is still robust enough for analysts to expect rates to increase further in the region.

Any additional corporate earnings write-downs from the sub-prime crisis during the summer would be expected to weigh on the dollar
James Hughes, CMC Markets

These factors have leant support to the pound and euro, which are currently offering a better rate of return than the dollar.

But the euro's strength could be bad news for European exporters, as it makes sales abroad more expensive and therefore less competitive.

A 10% gain in the euro bloc's currency this year contributed to a worse-than-expected fall in German manufacturing orders for September and a worsening outlook for Europe's biggest economy, analysts said.

"The stronger euro, higher oil prices, the credit crunch and weaker global growth fears are all compounding a weaker outlook for orders, output and jobs," said David Brown, an economist at Bear Stearns.

No silver lining

The dollar has been sliding since the US Federal Reserve chopped interest rates from 5.25% to 4.75% in September.

Rates were reduced further in October to 4.5% in an effort to kickstart the faltering housing and credit markets, as well as making borrowing cheaper to encourage consumer spending in the run-up to the key Christmas shopping period.

The Fed signalled that it would adopt a wait-and-see approach to the future direction of interest rates.

But the continued dollar sell-off suggests that the market believes the Fed will be forced to intervene and cut rates further to prevent the US economy from tipping into a recession.

This reaction stems from the recent emergence of hefty losses at global banking giants, such as Citigroup, Merrill Lynch and UBS, linked to investments backed by US home loans which have gone sour, analysts observe.

This has led to worries that banks may be sitting on even bigger losses, which ultimately could constrain their ability to lend to individuals or businesses and thus hamper economic growth.

"Any additional corporate earnings write-downs from the sub-prime crisis during the summer would be expected to weigh on the dollar," said James Hughes at CMC Markets.

Graph showing the dollar's decline against the euro



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