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Friday, September 21, 2007

Euro Reaches All-Time High Against Dollar - New York Timesgle Toolbar

It's time to pay the Piper...
Euro Reaches All-Time High Against Dollar - New York Times

The New York Times

September 20, 2007

Euro Reaches All-Time High Against Dollar


FRANKFURT, Sept. 20 — Investors around the world dumped the dollar today, pushing it to an all-time low of $1.40 against the euro and to parity with the Canadian dollar for the first time in three decades as currency traders digested the full implications of the Federal Reserve's new course for interest rates.

The frenzied selling began early in the day in Europe, never let up, and reached across the Atlantic as traders concluded that the lower borrowing costs the Fed introduced on Tuesday would dampen the appeal of dollar-denominated assets like stocks, bonds and real estate just as other central banks are raising rates to create the opposite effect.

With the Fed's action layered atop a weakening American economy that is menaced as well by the prospect of a retreat by consumers who have driven growth for years, the dollar radiated instability. Its traditional role as a refuge in times of crisis, evident as recently as early August, appeared all but forgotten.

"It's pretty ugly right now for the dollar," said Jim McCormick, the London-based chief of currency strategy for Lehman Brothers International. "But the markets are having a very rational response to what the Fed did on Tuesday."

The dollar dipped as low as $1.4094 in midday trading in New York, having cracked the $1.40 level in London, the world's currency trading hub. The dollar also lost ground against the pound, with sterling now worth roughly $2.

The Japanese yen and the Swiss franc also rallied strongly against the dollar, a highly unusual development since interest rates are still comparatively low in both those countries. The yen registered its biggest daily drop against the Japanese yen in two weeks.

Against the Canadian dollar, currency of the largest United States trading partner, the dollar tumbled to one-to-one, a level not seen since the 1976, the early phase of a currency crisis that would eventually send shock waves through the world economy.

"It seems light years from five years ago when the dollar was threatening to drop below 60 cents," said Douglas Porter, an economist with BMO Nesbitt Burns, the brokerage unit of the Bank of Montreal. "It will affect the psychology here in a big way."

Gold prices also soared, reaching a 27-year high at $746.50 an ounce in New York trading before closing at $739.90, up $10.40.

Still, currency analysts are dodging the label "dollar crisis" for the moment, preferring to see today's events as the logical outcome of the Fed's surprise decision to lower its benchmark rate by a half percentage point, to 4.75 percent — a step intended to quarantine the wider economy from the effects of a housing market collapse and soothe jittery credit markets.

But there is little doubt that attitudes toward the dollar are evolving faster that most analysts had expected.

"What is changing here is that people have been living with this notion that the dollar might get weaker briefly and then recover," said Thomas Stolper, a currency strategist with Goldman Sachs in New York. "But that view is evolving."

The Federal Reserve chairman, Ben S. Bernanke, acknowledged the gravity of the crisis during an appearance before a House committee today, while rationalizing the rate cut as part of the careful balance the central bank has to strike between combating inflation and promoting growth.

Treasury Secretary Henry M. Paulson Jr., at the same event, said the Bush administration was considering allowing the federally-backed mortgage agencies Fannie Mae and Freddie Mac to buy and securitize "jumbo" loans of over $417,000. In theory, the step would help relax stretched mortgage markets.

President Bush also chimed in with soothing words, even as the world ever-more heatedly debates whether the U.S. economy will fall into recession. "The fundamentals of our nation's economy are strong," Mr. Bush said at a news conference. "There is no question that there is some unsettling times in the housing market."

But almost daily, the American economy seems to be providing fresh evidence that the real estate slump might jar consumers into spending less — a fear evidently shared by policy makers at the Fed. That has given a fresh impetus to traders bearish on the dollar.

"I'm not sure you can argue that it is just interest rate differentials driving the dollar's weakness," said Mitul Kotecha, global head of foreign exchange research at Calyon in London. "The Fed is validating this course, but underlying that is concerns about economic growth."

In Europe, the dollar's record-breaking tumble set off a political reaction that has become common in recent years, with the French finance minister, Christine Lagarde, calling for a continent-wide effort to reverse its course.

"Let's say that it's a change in level that concerns all of us Europeans, and it's clearly a point we must address together among Europeans," Ms. Lagarde said during a trip to China, Reuters reported.

French worries about the rise of the euro, the unified currency established in 1999, have gone largely unheeded in other European capitals. Ms. Lagarde's German counterpart, Peer Steinbrück, even went so far as to say, "I love a strong euro." Yet even in Germany, the export dynamo of Europe, some spotty evidence is starting to accumulate that the currency's strength is chipping away at sales by making shipments abroad more expensive.

Ralf Wiechers, chief economist for VDMA, the association representing the machine tool makers whose performance has been the backbone of the German boom, said that market share was holding up thanks to stiff worldwide growth. But currency values are starting to influence how much money they are making.

"The world economy is creating the volume," Mr. Wiechers said. "The exchange rate is starting to decide what the profit margin is." As an example, he cited makers of printing presses, who face tough competition from American and Japanese companies that now enjoy a considerable exchange-rate advantage over the Germans.

Yet at its broadest level, the strong euro offers some advantages to Europe. Most notable is the ability to acquire raw materials, above all oil, with a muscular currency.

Oil prices set another record on Thursday, reaching $82.55 in New York. In theory Europeans are insulated by the spike through the euro, but that effect is bound to distribute itself in various ways, economists said.

For example, big importers and refiners of crude can expect a shot in the arm, maybe even enabling them to hire more people. But manufacturing employees who get laid off because sales ebb on the back of a strong euro cannot simply go into the energy business.

"In a textbook case, what you would in effect see is big shifts of economic resources," said Erik Nielsen, chief Europe economist at Goldman Sachs. "But this is an economy in which some win and some lose."

In Canada, meanwhile, economists generally agree that the Canadian dollar's ascent, which picked up speed about two years ago, is mostly related to the Canadian economy's health rather than shortcomings in the United States' economy.

Demand, much of it from Asia, has bolstered prices for several majorCanadian exports including minerals, oil and wheat. At the same time the Canadian government, which restructured its operations and finances during the 1990s, is on track to report its 11th consecutive budget surplus.

As the chief economist of the Canadian Manufacturers and Exporters, a lobby group, Jayson Myers, finds little professional joy in the Canadian dollar's ascent. But he readily acknowledged that achieving parity would bolster Canadians' spirits.

"It makes a lot of people feel pretty good," said Mr. Myers, who is based in Ottawa. "They can go on trips to the States again, they can go on trips to Europe. After 16 years of always seeing their currency in an inferior position, Canadians now have strong buying power."

But that, in the end, may also mean that some of the biggest gains from a strong Canadian dollar will ultimately accrue outside of Canada, particularly to the United States travel and retail industries.

Ian Austen contributed reporting from Ottawa.


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