The dollar touched a fresh two-month low against the euro yesterday as investors shunned the greenback on signs that the US economy is slowing.
The US currency also fell against most other major currencies, extending a decline from Friday sparked by data that showed softer US consumer sentiment.
That boosted expectations that the Federal Reserve may hold interest rates steady again next month, chipping away at the dollar's yield advantage over other currencies.
"The perception out there is the Fed has been removed from the picture, and that's very negative for the dollar," said Peter Schiff, president of Euro Pacific Capital in Darien, Connecticut.
Economists believe slower US growth will allow the Fed to cut interest rates in the second half of 2007. According to recent surveys, however, only one in five economists forecast a recession.
A key beneficiary of dollar selling has been the euro, which hit its highest level against the US currency since early June and traded at a record high against the yen on expectations of a widening interest rate gap between the euro zone and Japan.
The euro climbed at one point yesterday to $1.2939 before easing back to $1.2905, still up 0.6 per cent from late Friday.
The euro rose as high as 149.75 yen, its highest level since it was launched in 1999 before retreating slightly.
The European Central Bank raised interest rates to 3 per cent earlier this month and signalled more increases to come.
In contrast, the Bank of Japan has said it will move slowly before following up last month's 0.25 percentage point rate rise - the first in six years - with more tightening.
The Fed left interest rates steady at 5.25 per cent this month after 17 straight increases over more than two years, and Fed funds futures are pricing in just 12 per cent chance of a move to 5.5 per cent at the central bank's September meeting.
Rising rates had been the key source of support for the dollar in recent years and was "the one thing the dollar bulls had going for them and dollar bears had to contend with," Mr Schiff said.
The euro was also helped by data showing the euro zone's foreign trade swung to a €2 billion euro surplus in June from a €3.2 billion euro deficit in May.
The dollar was up 0.1 per cent to 115.90 yen yesterday with rising oil prices weighing on the Japanese currency. Crude prices rose yesterday after Iran said it would not meet United Nations demands to suspend uranium enrichment. Iran said it will respond by today to proposals by the US, Russia, China, France, Britain and Germany.
But Mr Schiff said over the longer term, the yen and other Asian currencies stand to gain the most from a sustained dollar decline that is likely to pick up steam this year and carry over into 2007.
- (Reuters)
