No end in sight for dollar weakness
No end in sight for dollar weakness
By Neil Dennis
Copyright The Financial Times Limited 2007
Published: April 18 2007 11:30 | Last updated: April 18 2007 11:30
There was no end in sight for the dollar’s decline on Wednesday with the pound hitting a 26-year high and the euro edging closer to a new record against the US currency.
Sterling extended Tuesday’s gains, hitting $2.0133, a level unseen since June 1981.
While UK and eurozone interest rates continue higher, the next move for US rates is expected to be lower. With structural imbalances in the US also undermining its currency, how much further is the dollar likely to sink?
How low can the dollar go?
Minutes from the Bank of England’s last policy meeting reinforced expectations of a 25-point interest rate increase to 5.5 per cent next month after two members of the monetary policy committee voted for a rate rise this month.
Meanwhile, the hawkish data continued to pile up. Following Tuesday’s shock inflation reading of 3.1 per cent, pressure on the BoE intensified as data from the Office for National Statistics showed average earnings rose by 4.6 per cent in the three months to the end of February – above the 4.5 per cent level which the central bank considers consistent with stable inflation.
With inflation in the US appearing relatively benign, traders and economists considered how long the dollar could possibly keep falling.
Michael Metcalfe at State Street said: ”For all the headlines that $2 sterling will create, by our broader measures the pound is neither overvalued or overbought.”
He added: ”With the latest inflation data almost guaranteeing a hike in interest rates in May, the potential for further sterling appreciation beyond $2 is high.”
Eurozone data and an increasingly hawkish European Central Bank have indicated eurozone rates, having been left on hold this month, will be lifted again by 25 points to 4 per cent in June.
Again, analysts believed there was much scope for further euro appreciation against the dollar.
Brian Garvey at State Street said the euro’s record $1.3670 hit in the last week in December 2004, was largely a function of low liquidity and rumour-driven market conditions that kept the single currency above $1.36 for only four days.
”$1.36 today is largely a function of the cyclical divergence between the US and eurozone economies, rather than central bank rumors, ill-timed comments by policymakers, or illiquid market conditions,” he said.
He added: ”It is for this reason why we believe the current move to $1.36 and beyond will prove more sustainable.”
By late morning in London the euro was up 0.2 per cent against the dollar at $1.3604, having extended its two-year high to $1.3616.
Other currencies hit fresh historic levels. The New Zealand dollar climbed as slightly softer-than-expected inflation data did nothing to alter the view that the country’s rates – which already stand at 7.5 per cent – have further to go.
The Kiwi climbed as high as $0.7492, up 0.5 per cent, its highest level since it was first freely floated against the dollar in 1985.
By Neil Dennis
Copyright The Financial Times Limited 2007
Published: April 18 2007 11:30 | Last updated: April 18 2007 11:30
There was no end in sight for the dollar’s decline on Wednesday with the pound hitting a 26-year high and the euro edging closer to a new record against the US currency.
Sterling extended Tuesday’s gains, hitting $2.0133, a level unseen since June 1981.
While UK and eurozone interest rates continue higher, the next move for US rates is expected to be lower. With structural imbalances in the US also undermining its currency, how much further is the dollar likely to sink?
How low can the dollar go?
Minutes from the Bank of England’s last policy meeting reinforced expectations of a 25-point interest rate increase to 5.5 per cent next month after two members of the monetary policy committee voted for a rate rise this month.
Meanwhile, the hawkish data continued to pile up. Following Tuesday’s shock inflation reading of 3.1 per cent, pressure on the BoE intensified as data from the Office for National Statistics showed average earnings rose by 4.6 per cent in the three months to the end of February – above the 4.5 per cent level which the central bank considers consistent with stable inflation.
With inflation in the US appearing relatively benign, traders and economists considered how long the dollar could possibly keep falling.
Michael Metcalfe at State Street said: ”For all the headlines that $2 sterling will create, by our broader measures the pound is neither overvalued or overbought.”
He added: ”With the latest inflation data almost guaranteeing a hike in interest rates in May, the potential for further sterling appreciation beyond $2 is high.”
Eurozone data and an increasingly hawkish European Central Bank have indicated eurozone rates, having been left on hold this month, will be lifted again by 25 points to 4 per cent in June.
Again, analysts believed there was much scope for further euro appreciation against the dollar.
Brian Garvey at State Street said the euro’s record $1.3670 hit in the last week in December 2004, was largely a function of low liquidity and rumour-driven market conditions that kept the single currency above $1.36 for only four days.
”$1.36 today is largely a function of the cyclical divergence between the US and eurozone economies, rather than central bank rumors, ill-timed comments by policymakers, or illiquid market conditions,” he said.
He added: ”It is for this reason why we believe the current move to $1.36 and beyond will prove more sustainable.”
By late morning in London the euro was up 0.2 per cent against the dollar at $1.3604, having extended its two-year high to $1.3616.
Other currencies hit fresh historic levels. The New Zealand dollar climbed as slightly softer-than-expected inflation data did nothing to alter the view that the country’s rates – which already stand at 7.5 per cent – have further to go.
The Kiwi climbed as high as $0.7492, up 0.5 per cent, its highest level since it was first freely floated against the dollar in 1985.
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