Dollar hits new low versus euro

The greenback dropped as low as $1.3927 against the euro, deepening Wednesday's losses, but regained ground later to settle at $1.3886 in New York trading.

The dollar has fallen in the past week, amid hopes that Federal Reserve will cut interest rates in a bid to reassure markets over current credit fears.

Analysts expect the Fed to cut interest rates when it meets next week.

However, as the dollar has weakened, the euro has gained momentum after recent comments from the European Central Bank (ECB) hinting at the possibility of future interest rate rises.

Further gains?

The health of Europe's economy - underlined by strong growth and inflation figures from France - could help push the euro through the $1.40 barrier, some experts suggested.

"The catalyst sending the euro to its latest high against the dollar is the growing expectation that the Fed could trim interest rates by up to 50 basis points at its 18 September policy meeting," said Global Insight economist Howard Archer.

"Eurozone consumers could benefit from cheaper prices for some imported goods"
Howard Archer, Global Insight

"The euro seems likely to remain well supported against the dollar in the near term at least and could well break through $1.40 imminently."

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.

The increases have led to higher borrowing costs, triggering an increase in the number of people defaulting on loans, especially in the sub-prime mortgage market.

The sub-prime sector specialises in lending to people with poor or non-existent credit histories.

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.

Good and bad

The impact on the consumer and businesses may be mixed, analysts said.

According to Howard Archer of Global Insight, "eurozone consumers could benefit from cheaper prices for some imported goods".

At the same time, he said that there is some good news for eurozone companies because oil, metals and many raw material prices are quoted in dollars, and "the strength of the euro should dampen firms' input costs".

However, while the strong euro may cut some import costs, it could also have a negative effect on exports as European-made goods become more expensive. The US is one of Europe's largest trading partners.

"Everything that has a disadvantageous effect on exports is a problem, and the rising euro is part of that," Peter Bofinger, a member of the German government's independent economic advisory panel, was quoted as saying.

Speaking to the Berliner Zeitung, Mr Bofinger said that if the euro gets much stronger, then governments should think about buying the dollar in order to weaken the euro.