Dollar hits new low against euro

BBC
Thursday September 20, 2007

The US dollar hit a new record low against the euro as investors sold the currency after the Federal Reserve's hefty interest rate cut.
The greenback dropped below the psychologically important $1.40 against the euro, deepening recent losses.

The euro jumped to $1.4018 in early Thursday trading, the highest since the launch of the single European currency.

ECB hints of interest rate rises, and stronger European growth, have also boosted the euro's value.

Dampen costs

Analysts have said that the impact of the plunging dollar on European consumer and businesses may be mixed.

Eurozone consumers may benefit from cheaper prices for some imported goods.

At the same time, there is some good news for eurozone companies because oil, metals and many raw material prices are quoted in dollars, meaning that the strength of the euro should dampen firms' input costs.

However, while the strong euro may cut some import costs, it could also have a negative effect on exports as European-made goods become more expensive.

The US the Europe's largest trading partner.

It could also hurt growth in Asia, with the US being the largest market for China, Korea, and other Asian exporters.

Dollar problems

The dollar has been weakening for some time.

The fundamental problem is the growing US trade deficit, now more than $700bn, as the US economy has imported far more goods than it has exported.

This has long been seen as unsustainable, and in the long-run some kind of currency adjustment has been seen as both inevitable and desirable.

But the recent change in policy by the US central bank has accelerated the decline, because people who put their money in dollars no longer get such a high rate of return.

The Fed acted in order to stem problems in the US housing market, caused by an increase in the number of people defaulting on loans, which could cause an economic slowdown across the board.

A US economic slowdown could also hurt the dollar in the short-term, although it might also lower the trade gap as there could be less demand for foreign goods by US consumers.