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Dollar Falls to Record Against Euro as EU Inflation Quickens
Bloomberg
By Ye Xie and Bo Nielsen
April 16, 2008

April 16 (Bloomberg) -- The dollar fell to a record low against the euro as European inflation accelerated last month, reducing chances the European Central Bank will follow the Federal Reserve in cutting interest rates.

The currency had its biggest decline versus the euro in three weeks, weakening to $1.5979 as U.S. housing starts dropped more than twice as much as forecast to a 17-year low. The Canadian and Australian dollars and the Norwegian krone increased after crude oil touched a record $115.07 a barrel.

"We are seeing noticeable contrast between the ECB and Fed policies," said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. "The euro-dollar at these levels feels like a stretch, but the trend is your friend."

The dollar depreciated 1.1 percent to $1.5958 against the euro at 4:07 p.m. in New York, from $1.5790 yesterday. The dollar decreased 0.1 percent to 101.69 yen, from 101.83. The euro rose 0.9 percent to 162.26 yen after touching 162.38, the highest level since Jan. 2.

The U.S. currency has fallen almost 1 percent against the euro since Group of Seven finance ministers said after meeting in Washington on April 11 that they're concerned "sharp fluctuations" in currency markets may hurt the global economy.

"The further we get away from the G-7 statement, people realize it really doesn't change policy in the near term," said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago. "The likelihood of intervention remains very low if the decline of the dollar is orderly."

Currency Volatility

Implied volatility on options for the six most active currencies against the dollar rose to 11.69 percent today, from 11.58 yesterday, according to an index compiled by JPMorgan Chase & Co. The gauge touched a decade high of 14.48 on March 17, a level at which the G-7 bought the dollar to check its decline in a coordinated move in 1995.

The euro rose 0.7 percent against the pound today after touching the all-time high of 80.98 pence on the European inflation report. The Bank of England cut its target lending rate by a quarter-percentage point to 5 percent on April 10.

Norway's krone touched 4.9459 per dollar, the strongest since 1980, on crude oil prices that are 81 percent higher from a year ago. The Canadian dollar rose 1.7 percent, the biggest gain in seven weeks, while the Australian dollar increased 1.3 percent. Norway is the world's fifth-largest oil supplier, while commodities such as oil and gold account for half of Canada's exports. Exports of commodities such as iron ore and coal make up about 17 percent of Australia's economy.

Oil and Dollar

Crude oil and the euro versus the dollar have moved in lockstep in the past year. The correlation coefficient between the two was 0.957. A reading of 1 indicates they always move in the same direction.

Expectations became less bearish for the dollar, a survey of U.S. users of Bloomberg terminals showed. The index of expectations rose to 42.87, from 30.30. A reading below 50 indicates participants expect the currency will weaken. Users turned bearish against the Swiss franc and British pound.

The dollar has dropped 15 percent against the euro since September as the Fed cut the target lending rate 3 percentage points to 2.25 percent to protect the U.S. economy from the collapse of the subprime-mortgage market.

Former Treasury Secretary Paul O'Neill said in an interview with Bloomberg Television that the "strong dollar" policy he and every other Treasury chief since 1995 endorsed is "a vacuous notion."

Dollar Outlook

The dollar may weaken to $1.6460 per euro by May 5, wrote Andrew Chaveriat, a currency strategist in New York at BNP Paribas Securities SA, in a research note. Before today, the U.S. currency depreciated beyond $1.5895 three times since mid- March, only to rise. Ending the day weaker than $1.5925 would "confirm" a break in the pattern, Chaveriat said.

Futures on the Chicago Board of Trade showed investors are certain policy makers will reduce the fed funds target by at least a quarter-percentage point on April 30. The yield on three-month Euribor contracts expiring in December rose 0.07 percentage point to 4.28 percent, indicating traders are betting ECB policy makers will keep the main refinancing rate unchanged at the six-year high of 4 percent this year.

The European inflation rate accelerated to 3.6 percent last month, the highest in almost 16 years, the European Union's statistics office said today.

Work began on 947,000 U.S. homes in March at an annualized rate, down 11.9 percent from February and the fewest since March 1991, the Commerce Department said. Starts were projected to fall 5.2 percent to a 1.01 million pace from an originally reported 1.065 million rate in February, according to the median forecast of 72 economists surveyed by Bloomberg News.

Economic growth has slowed in nine of the Fed's 12 districts since February, hurt by "anemic" real estate markets and a slowdown in consumer spending, the central bank said today in its regional business survey, known as the Beige Book.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Bo Nielsen in New York at bnielsen4@bloomberg.net.

Last Updated: April 16, 2008 16:08 EDT

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