The dollar fell to a record low against the euro yesterday as investors prepared for the Federal Reserve to slash interest rates next week, putting further pressure on Irish exporters.
The greenback declined for the sixth day in succession against the euro, which at one point rose to a record $1.3915, according to electronic trading platform EBS. It last traded at $1.3907, up 0.5 per cent from late Tuesday.
Against a basket of currencies, the dollar plumbed a fresh 15-year low and it was unable to sustain gains on the yen after the resignation of Japanese prime minister Shinzo Abe.
Problems in global credit markets and weak US jobs and housing data have investors bracing for a half-percentage-point cut in the 5.25 per cent federal funds rate when central bank officials meet next Tuesday.
"It's all about lower growth, lower rate expectations now," said Gregory Salvaggio, senior currency trader at Tempus Consulting in Washington.
"That combination is fuelling a shift to the euro, especially ahead of the Fed's meeting next week, and now that we broke $1.39, the next one at $1.40 is within sight."
Worrying signs about the health of the US economy have been building since a report last week showed US payrolls contracted in August for the first time in four years. US treasury secretary Henry Paulson conceded on Tuesday the crisis in the credit markets will last longer than any of the financial shocks of the last two decades.
Unlike the Fed, the European Central Bank (ECB) is seen leaving rates on hold at 4 per cent or possibly raising them again, although Goodbody Stockbrokers economist Dermot O'Leary said yesterday that further interest rate increases would become less likely the longer the ECB holds off hiking rates.
The ECB yesterday poured an extra €75 billion into troubled euro-zone money markets in an unscheduled lending operation, a sign of continued mutual suspicion among the big commercial banks about each others' creditworthiness.
It said 140 banks applied for €139 billion in central bank deposits after the ECB made what was only its second-ever offer to lend three-month money outside the normal monthly schedule.
The banks agreed to pay an average rate of 4.52 per cent, below current inter-bank prices of 4.75 per cent but well above the ECB's target rate of 4 per cent.
Mr O'Leary said two real risks were now emerging for economic growth in Europe next year: the risk that problems in the money markets will feed their way into real economic activity; and the risk posed by the euro's ascent to an all-time high relative to the dollar, which makes it a more difficult environment for European exporters.
John Whelan, the chief executive of the Irish Exporters Association, said exporters were facing a double hit because the euro is also trading at high levels against Asian currencies such as the yen.
Many companies were able to hedge their exposure to the falling dollar over six or nine month periods, but the currency has now been weakening relative to the euro since January 2006.
However, Davy Stockbrokers economist Robbie Kelleher said the impact of the faltering dollar would have a limited impact on the Irish economy, as a substantial portion of exports to the US are from multinationals where the goods exported are already priced in dollars. ( Additional reporting: Financial Times service/Reuters )
