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Originally published September 21, 2007 at 12:00 AM | Page modified September 21, 2007 at 6:04 PM

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Dollar's new low against euro worries France

The dollar hit a new low against the seemingly unstoppable euro today as the 13-nation currency broke through $1.41. The euro's ascension drew...

The Associated Press

FRANKFURT, Germany — The dollar hit a new low against the seemingly unstoppable euro today as the 13-nation currency broke through $1.41.

The euro's ascension drew renewed calls from French President Nicolas Sarkozy for the European Central Bank (ECB) to follow the Federal Reserve and cut interest rates, which would help keep French exports competitive.

Despite the worries of some exporters — European aircraft maker Airbus said if the euro keeps rising it may have to seek new cost savings — ECB President Jean-Claude Trichet and German Chancellor Angela Merkel stood firm that the ECB must remain independent.

The currency of the 13 euro nations, which have more than 317 million residents and account for more than 15 percent of global gross domestic product, surged as high as $1.4119 before falling back to $1.4083 by late afternoon, above the $1.4076 it bought in New York on Thursday.

The U.S. dollar fell further against the Canadian dollar after reaching parity for the first time since 1976 on Thursday. One Canadian dollar bought $1.0068 in U.S. currency at its highest point today before edging down to 99.95 U.S. cents in late New York trading, barely beating 99.93 U.S. cents late Thursday.

The Canadian dollar has experienced a summer of record highs on soaring crude prices and a strong economy. Retail prices, however, have yet to adjust, according to an economist at one of Canada's large banks.

Doug Porter, deputy chief economist at the Bank of Montreal, released a study Friday that indicates Canadians are paying roughly 24 percent more than Americans on identical goods despite parity in the U.S and Canadian dollars.

Porter compared 17 goods sold in Canada and the U.S., finding that retail prices in Canada have not yet responded because most are set a year in advance.

The dollar weakened sharply this week on the back of a decision by the U.S. Federal Reserve to cut its benchmark rate by a bigger-than-expected half point to 4.75 percent. The central bank was responding to market turbulence in the U.S. and elsewhere in the fallout from the subprime mortgage crisis.

"Furthermore, there are widespread expectations that the Fed will trim interest rates further over the coming months," said Howard Archer, the chief U.K. and European economist for Global Insight. "In contrast, the European Central Bank still retains a clear bias toward raising interest rates further, despite shelving its original plans to act at its September meeting due to the current uncertainty and turmoil in global credit and financial markets."

Lower interest rates, used to jump-start the economy, can also weaken a currency. Investors can get greater returns from countries with higher interest rates, so money flows to investments in those countries' currencies. Also, foreign investors in a currency that is losing value get relatively lower returns when they cash in their stocks and bonds.

The ECB kept its benchmark rate unchanged at 4 percent at its Sept. 6 meeting and the Bank of England is expected to keep its rate steady at 5.75 percent when it meets next month.

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As the dollar weakens against the euro, it could dampen European exports to the United States, making European-made products from automobiles to consumer appliances more expensive for American buyers. It also makes European vacations more expensive for visitors from the U.S.

The strength of the currency is becoming a political issue, particularly in France, which has repeatedly demanded that the ECB ends its nearly two-year rate hike campaign.

"I don't criticize Trichet," Sarkozy told French television on Thursday. "But I'm saying: look at what's going on," adding "in the current economic situation, the Fed cuts rates, the ECB doesn't cut them."

Trichet said in a speech Thursday night that independence is the cornerstone of the bank's monetary policy because it "allows the central bank to pursue its primary objective and to take full responsibility for its action."

Merkel reiterated her stance, saying "even the slightest hint" that the ECB was not independent could put the euro's stability in jeopardy.

But others want to see the bank move, quickly.

"Such a strong euro cannot do good to Europe's economy and not even to the feeble signals of recovery of Italy," Eni CEO Paulo Scaroni was quoted as saying by the ANSA news agency.

Airbus Chief Operating Officer Fabrice Bregier, the company's No. 2 executive, said in an interview today with BFM radio that the company's cost-savings and restructuring program was based on a euro-dollar rate of $1.35 and aimed at generating $2.8 billion in savings. If the euro rises to $1.45, he said Airbus would have to seek an additional $1.4 billion in savings.

"If the euro were to remain lastingly above $1.40, well obviously we'd have to adjust," he said.

That could happen; analysts say fears of more U.S. interest rate cuts could drive the euro higher.

Fed Chairman Ben Bernanke's remarks to Congress on Thursday did not assuage fears about the U.S. economy, said David Jones, chief market analyst at CMC Markets in London, but rather "reignited fears that there may be further bad news to come with regard to the U.S. subprime mortgage market."

In Frankfurt, Fed Vice Chairman Donald Kohn defended the cut.

"I suspect that, when studies are done with cooler reflection, the causes of the swing in house prices will be seen as less a consequence of monetary policy and more a result of the emotions of excessive optimism, followed by fear, experienced every so often in the marketplace through the ages," he said in prepared remarks to a conference celebrating the 50th anniversary of Germany's central bank, the Bundesbank.

Both Global Insight's Archer and CMC's Jones said that those fears are putting more pressure on the dollar and causing buyers to look to safer havens, namely the euro and the British pound. Archer reiterated that "$1.45 is a serious possibility before the end of the year."

While it's not quite a crisis for the dollar, Jones said, "It's fair to say that confidence in the greenback has been truly shaken."

Copyright © 2007 The Seattle Times Company

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