Rate fears undermine dollar

Peter Garnham
Financial Times
Thursday October 25, 2007

The dollar remained on the back foot on Thursday as the prospect of further cuts in US interest rates continued to weigh on the currency.

Analysts said weak US housing figures released on Wednesday, combined with poor third-quarter results from Merrill Lynch, the US banking group, had added to the gloom surrounding the prospects for the US economy.

Lee Hardman, currency economist at the Bank of Tokyo-Mitsubishi UFJ, said although markets were now fully pricing a 25 basis-point cut at the Federal Reserve’s meeting on October 31, the potential for a 50 point cut should not be ruled out given the rapidly deteriorating conditions in the housing market and dislocated financial market conditions.

“In an environment pointing to a pronounced slowdown in US economic growth and additional monetary easing in the US, the dollar is likely to come under further downward pressure,” he said.

The dollar eased 0.1 per cent to $1.4277 against the euro, within a cent of the record low around $1.4350 it hit against the single currency on Monday.

The euro was also supported as the German Ifo index of business sentiment fell by less than expected in September.

“The survey supports our view that, while the German recovery has passed its peak, growth remains relatively healthy for now,” said Jennifer McKeown at Capital Economics.

The dollar also dropped 0.2 per cent to SFr1.1695 against the Swiss franc and 0.2 per cent to C$0.9667 against the Canadian dollar.

However, the pound eased 0.1 per cent to $2.0480 against the dollar and fell 0.2 per cent to £0.6969 against the euro after the Bank of England warned that the UK financial system remained vulnerable to new shocks from the global credit squeeze.

Hans Redeker at BNP Parisbas said the report suggested that the UK economy was more vulnerable than recent speeches by member of the central bank’s monetary policy committee and various third-quarter UK economic data releases might have suggested.

Full article here.