Euro Reaches New High Against Dollar
The euro climbed to a record high of $1.5070 in midmorning European trading on Wednesday as sentiment increased that the U.S. Federal Reserve would continue its rate cut campaign.
The 15-nation currency hit a series of highs, culminating in $1.5071 before 10 a.m. (0400 Eastern) before falling back slightly to $1.5063, nearly a full cent more than the $1.4967 it bought in late trading in New York on Tuesday, which was equal to the last record high it had reached, back in November.
In other trading, the British pound soared to $1.9941 from $1.9862 late Tuesday, while the dollar fell to 106.40 Japanese yen from 107.26 yen.
Along with the rise in the British pound, which is nearing $2 again, the surging euro will not be kind to Americans visiting Europe - they'll have to pay more for hotel rooms in Rome, entrance fees at the Louvre and chocolates in Belgium.
On the other hand, the stronger euro makes shopping trips to the U.S. more appealing to Europeans.
A higher euro also makes goods from the euro-zone more expensive for customers abroad, or cuts into manufacturers' profits if they try to keep the U.S. dollar price of products constant.
Howard Archer, the chief UK and European economist for Global Insight, said the euro's strength is not likely to weaken anytime soon, given that any "worsening in U.S. interest-rate differentials dilutes a key support for the dollar."
He also said that weaker growth prospects in the United States, coupled with its deficit will "exert a significant downward influence" in the long term and cause some countries to shift more of their reserves from dollars to other currencies, including the euro.
"In addition, there is the very real possibility that several countries could switch a proportion of their foreign currency reserves out of U.S. dollars over time," he said.
Gary Thomson, an analyst with CMC Markets in London, said the euro surged because markets are looking for clues from Fed Chairman Ben Bernanke about more rate cuts in the U.S. when he addresses lawmakers there later in the day.
"Inflation - or perhaps more to the point stagflation - remains a concern for the Fed as seen with yesterday's PPI data and as a result now that the most significant of psychological levels since parity has gone, we could see further downside pressures emerging for the greenback," he said, referring to a string of disappointing economic reports out of the U.S. on Tuesday.
Those reports included the New York-based Conference Board's Consumer Confidence Index, which fell to 75 in February from 87.3 in January, its lowest level since February 2003. Meanwhile, the U.S. Labor Department reported that wholesale inflation rose by 1 percent in January - more than analysts estimated - on rising oil and food costs. Finally, Standard & Poor's reported that U.S. home prices fell 8.9 percent in the last three months of 2007 from a year earlier, its sharpest drop ever.
Those reports, along with remarks by Federal Reserve Vice Chairman Donald Kohn that appeared to diminish inflationary concerns and focused instead on greater near-term risk to growth were seen as a clue that Bernanke is expected to signal more rate cuts.
But, at the same time, the European Central Bank, which has left its own rates unchanged since last summer, is expected to keep them at 4 percent when it meets next week.
Lower interest rates can jump-start a nation's economy, but may weigh on its currency as traders transfer funds to countries where they can earn higher returns.