Alexa

Euro tops US$1.51, buoyed by dour US economic reports, rate cut hints

Euro tops US$1.51, buoyed by dour US economic reports, rate cut hints

The euro soared Wednesday to the highest level in its eight-year history, climbing above US$1.51 after markets took comments from the Federal Reserve chairman as a sign that more U.S. rate cuts are on the way.
The 15-nation euro topped US$1.50 for the first time since its 1999 introduction in Asian trading, then surged in Europe after Fed Chairman Ben Bernanke told the House Financial Services Committee that "the economic situation has become distinctly less favorable" since last summer.
That added to sentiment that the Fed is likely to continue to recent rate cuts that already have left U.S. interest rates below the euro zone's.
The euro surged to US$1.5133 after Bernanke's testimony _ well above the US$1.4967 it bought in New York late Tuesday.
Lower interest rates can jump-start a nation's economy, but can weigh on its currency as traders transfer funds to countries where they can earn higher returns. Worries about the U.S. economy have helped drive down the dollar for months.
Since Bernanke's last similar assessment, the U.S. housing slump has worsened, credit problems have intensified and the job market has deteriorated. Bernanke said those factors combined to make people and businesses alike more cautious toward spending and investment _ further weakening the economy.
Despite the roaring euro, growth is still on track in Europe and markets are optimistic that, should the U.S. go into recession, the continent would be able to weather the storm.
The European Central Bank has left interest rates unchanged since last summer and is expected to keep them at 4 percent when it meets next week.
"The U.S. economy is still in a weak period and we cannot estimate how long that is going to go on," Christoph Schmidt, an analyst with N.M. Fleischhacker Trading Bank in Frankfurt, told AP Television News.
"The market is counting on the Fed lowering the interest rates even further and on the fact that the ECB is going to keep them where they are," Schmidt said. He added that the divergent interest rates were "good for the euro and bad for the dollar."
In other trading, the British pound soared to US$1.9971 before falling back to US$1.9912 _ above its level of US$1.9862 late Tuesday. The dollar fell to 106.38 Japanese yen from 107.26 yen.
Neither the surging euro nor the British pound's latest flirt with the US$2 level will be kind to Americans visiting Europe. They will have to pay more for hotel rooms in Rome, entrance fees at the Louvre and chocolates in Belgium.
"Oh, it's affecting what we do," Idaho resident Ray Tussing said in Paris. "We're avoiding major restaurants because they are quite pricey to have a full dinner. And so what we're doing is that we're eating off of stands, we're eating pizza _ we're eating smaller simpler things in order to try and keep our costs down."
For Europeans, the dollar's swoon makes shopping trips to the U.S. even more appealing. It is less good news for their companies, since the high euro makes their goods pricier for overseas customers and can cut into their profits if they try to keep the dollar price of products constant.
In Paris, France's budget minister Eric Woerth said that the "very high" euro was "a handicap for our exports."
In Germany, however, the chief economist of the country's Chambers of Commerce said the record euro is not expected to have a lasting negative effect on the country's economy _ Europe's biggest.
"We can't yet speak of a threshold of pain for German exporters," Volker Treier told Dow Jones Newswires, describing the euro's current levels as a "rather temporary deflection."
However, Howard Archer, the chief British and European economist for Global Insight, said that weaker U.S. growth prospects _ coupled with the country's current account deficit _ will "exert a significant downward influence" in the long term.
"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.
The euro was buoyed by a string of disappointing economic reports out of the U.S. on Tuesday, including the New York-based Conference Board's Consumer Confidence Index, which fell to 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.


Updated : 2021-01-24 16:24 GMT+08:00