LOS ANGELES – IN THE Federal Reserve’s battle to keep the United States economy from a severe downturn, the beleaguered US dollar is getting walloped anew.
That is going to worsen the sticker shock for Americans headed overseas or buying some of their favourite imported goods.
But it also will underpin the current boom in US exports, which has helped offset some of the economic pain of the housing bust – at the expense of Asian and European exporters.
The dollar hovered near a record low against the euro at US$1.511 in Tokyo trading yesterday, just off a record of US$1.5144 struck on Wednesday.
Six years ago, one euro could fetch less than 87 US cents.
The dollar also fell to its lowest level in years against the Singapore dollar, Australian dollar, Swiss franc, Brazilian real, Russian rouble and a number of other currencies.
The latest plunge in the greenback’s value followed Fed chairman Ben Bernanke’s testimony on Capitol Hill on Wednesday, where he described the economy as ‘distinctly less favourable’.
He also made it clear that the US central bank was more worried about risks to growth than inflation.
He all but assured Congress that the central bank would continue to cut short- term interest rates.
To currency traders worldwide, that was a signal to dump the dollar again, deepening what has been a losing trend for the greenback since 2001.
Generally, the weaker a country’s economy is and the lower its interest rates, the weaker its currency gets as some global investors opt to take their money elsewhere – in the process selling one currency to buy another.
Wall Street is now convinced that the Fed will slash its benchmark rate by 50 basis points to 2.5 per cent from 3 per cent – a bigger cut than previously expected – when the central bank’s policymakers meet on March 18.
By contrast, the European Central Bank has held its key rate at 4 per cent since last June and shows no sign of wanting to join the Fed in easing credit. Higher European rates support the euro’s value at the dollar’s expense.
Source: LOS ANGELES TIMES (The Straits Times 29 Feb 08)