Thursday, July 19, 2007

Dollar at lifetime low against euro

Dollar at lifetime low against euro
By Neil Dennis
Copyright The Financial Times Limited 2007
Published: July 19 2007 03:00 | Last updated: July 19 2007 03:00

The US dollar fell yesterday as expectations of moderating US inflation, a sluggish housing market and moderate growth prospects revived the possibility of interest rate cuts later in the year.

Ben Bernanke, chairman of the US Federal Reserve, told US lawmakers yesterday that the closely watched core inflation data - which leaves out the volatile food and energy prices - had moderated over the past few months though underlying price pressures remained a concern for the central bank.

His comments came as consumer price inflation data showed core CPI rising 0.2 per cent month-on- month to an annualised2.2 per cent - as expected.

"Core CPI is at its lowest level in 15 months, lending further support to the Fed's case that slower growth will bring elevated core inflation back in line with price stability without resorting to higher rates," said Michael Woolfolk at Bank of New York.

Mr Bernanke said the pace of US home sales was expected to remain sluggish for some time. A separate set of data yesterday recorded a month-on-month increase in starts on new homes in June, however, the stronger-than-expected figure, was helped by a downward revision of the May figure.

Paul Ashworth at Capital Economics said: "We suspect the Fed could be forced to cut interest rates late this year as conditions in the labour market deteriorate."

By midday in New York the euro was up 0.2 per cent to $1.3810. The yen gained0.3 per cent to Y121.84, while sterling added 0.3 per cent to $2.0520.

Earlier, the dollar had wilted as financial markets were rocked again by investor worries about the fallout from problems in the subprime mortgage sector. Equity markets slumped, while the flight to safety lifted government bonds after Bear Stearns, the US investment bank, declared that its two subprime-focused hedge funds were "virtually worthless".

The dollar hit a new low of $1.3833 against the euro, and a new 26-year trough against the pound at $2.0548.

Sterling gained little momentum from the publication of the minutes of the last Bank of England monetary policy committee meeting.

Six of the nine MPC members voted to lift interest rates to 5.75 per cent at this month's meeting. Three, however, felt rates should go no higher until the tightening measures enacted so far have had time to feed through to the economy.

"This group could still change their mind given the recent [UK] inflation data," said James Knightley at ING. "CPI figures [on Tuesday] suggested core inflation pressures continued to build while energy and food prices remained under upward pressure."

The pound rose 0.1 per cent against the euro to £0.6725, and by 0.1 per cent against the yen to Y250.11.


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