Dollar in free fall, and this time it is different from ’04

Reuters
NEW YORK, APRIL 29: The last time the US dollar slid to a record low against the euro it quickly recovered, but this time may be different. The dollar slid to a new record low against the euro on Friday, with the euro quoted above $1.3680, the highest since the currency’s launch in 1999.

When the euro climbed above $1.36 in 2004, it satyed at that level for five days, and then embarked on a year-long decline. But unlike late 2004, when the Federal Reserve was in the early stages of a two-year rate rising cycle which provided some support for the dollar against the euro, US economic growth is now slowing and the Fed may even cut interest rates later this year.

At the same time, economies in the Europe and Asia seem to be weathering the US slowdown well, suggesting that interest rates in those regions may continue to move higher, drawing yield-hungry investors away from the dollar.

“I think we’re going to see $1.38 (euro/dollar) without too much trouble here,” said Joseph Trevisani, chief market analyst at FX Solutions, an online currency dealing platform based New Jersey.

The immediate trigger for the dollar’s fall on Friday was a report showing that the US economy grew at its most sluggish pace in four years during the first quarter.

By contrast back in late 2004, differentials were actually widening in the dollar’s favour as yields on euro-zone debt were falling on worries that the strong euro would strangle the European economy.

This week the dollar fell to its lowest level ever against a basket of major currencies tracked by the Fed since 1973.