Dollar sinks to another low against euro

US economy nearly halts, jobless claims rise
February 28, 2008 1:15:59 PM PST
The dollar dipped further Thursday, reaching a new low against the euro, after data confirmed that the U.S. economy nearly braked to a halt at the end of last year -- limiting the Fed's options as it tries to steer through the housing and credit crises.

The U.S. economy grew at a scant 0.6 percent pace in the October-to-December quarter, according to the Commerce Department report, compared with a much healthier 4.9 percent in the previous quarter.

That finding pushed the 15-nation euro to a record $1.5229 in New York -- past its previous record of $1.5143 set Wednesday.

The euro settled at $1.5215 in late trading, up from the $1.5120 it was worth late Wednesday.

Meanwhile, the British pound rose to $1.9926 from $1.9842. The dollar dipped to 105.36 Japanese yen from 106.45 yen.

The dollar also dropped to 1.0503 Swiss francs from 1.0622 francs late Wednesday.

Earlier, the dollar sank to 1.0485 francs, according to Dow Jones' Interbank foreign exchange rates, a record low against the Swiss currency.

The dollar's decline will likely complicate the Fed's decision-making this year, according to Michael Woolfolk, senior currency strategist at the Bank of New York.

"Keeping the dollar steady will be a challenge, as slow global growth has taken away the attractiveness of the stock market and low interest rates have slowed international investments in bonds," Woolfolk said.

"The dollar is likely to remain weak until one of two things happen this year: Either there's a clear indication that the U.S. economy is on the mend, or the ECB is prepared to cut interest rates. At this point, both seem improbable."

While the Fed has cut rates to try to spur the economy and loosen the credit squeeze -- moves that also drive the dollar lower as investors seek higher yields elsewhere -- the European Central Bank has refused to budge.

The euro topped $1.50 for the first time since its 1999 introduction early Wednesday, then surged above $1.52 after markets took comments from Federal Reserve Chairman Ben Bernanke as a sign that yet more U.S. rate cuts are on the way.

Bernanke told Congress on Thursday that he is prepared to lower rates even as high oil prices heighten inflation risks.

On Thursday, oil settled at a record $102.59 a barrel in New York, and continued to climb in after-hours trading, spurred in part by weakness in the U.S. currency in which the commodity is denominated.

Rising inflation can reduce the Fed's maneuvering room in terms of revving up a slowing economy, since raising rates is usually a way to control inflation.

Bernanke said that "the economic situation has become distinctly less favorable" since last summer. But he stressed that the nation is nowhere near the stagflation situation that plagued the 1970s.

Joel Naroff, chief economist at Naroff Economic Advisors, agreed that circumstances of that recession do not relate to today's economy.

"The recession then was so driven by wage price spirals and cost of living adjustments that just don't exist right now," Naroff said. "In addition to that, inflation at that time was in the double-digit range. When you take a look at those factors, what we have is an awfully scaled down version that hardly bears similarity."

On the heels of the Commerce Department report, the Labor Department reported Thursday that new applications for unemployment insurance benefits rose by 19,000 to 373,000 last week, more evidence that the general economic sluggishness is spilling over into the job market.

"With sentiment becoming increasingly pessimistic as to the outlook for the U.S. economy, it seems as if it will take a notable shift in sentiment if we're to see any real recovery," said Gary Thomson, head of sales trading at CMC Markets.

In other New York trading, the dollar dropped to 97.45 Canadian cents from 98.08 Canadian cents.


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