Dollar hits record low versus euro

April 22, 2008 2:06:08 PM PDT
The dollar sunk to a record low Tuesday against the euro, which crossed $1.60 after a pair of European Central Bank governors said high inflation may cause the bank to raise interest rates. The U.S. currency also fell against the Japanese yen and the British pound. The euro rose as high as $1.6018, more than a penny above the $1.5916 it bought late Monday. The euro has risen 20 cents against the dollar in just five months and 10 cents in just two months.

The 15-nation currency hit its last record of $1.5982 Thursday. It dropped back Friday after a Wall Street rally generated optimism that the worst of the U.S. credit crunch may be over, but the euro rose again Monday when Bank of America's first-quarter earnings fell short of expectations.

The dollar's slump is a boon for U.S. companies that rely heavily on exports, but it's the bane of travelers as worldwide inflation rises, air fares climb and prices rise in dollar terms for everything from beer in Munich to fine wine in Paris to gondola rides in Venice.

Tuesday's remarks by Yves Mersch in the Financial Times Deutschland and comments made by Christian Noyer to France's RTL radio showed the governing council of the ECB is committed get euro zone inflation back around 2 percent, below the current 3.6 percent it is at now.

It effectively threw water on any hopes of a rate cut by the bank, which has kept its benchmark rate unchanged at 4 percent since June even as the U.S. Federal Reserve, Bank of England and Bank of Canada have consistently lowered their own rates.

The Bank of Canada on Tuesday slashed its interest rate by half a percentage point to 3 percent. It also hinted another cut may be coming as it feels the effects of a slumping economy at its largest trading partner. The dollar edged up to 1.0084 Canadian dollars in late New York trading, from 1.0072 Canadian dollars Monday.

The dollar has been weighed down by a combination of gloomy U.S. economic data and high European inflation - fueling expectations that the Fed will cut interest rates yet again while the European Central Bank will leave rates unchanged.

Lower interest rates can weigh on a nation's currency as traders transfer funds to countries where they can earn better returns, while higher rates are used to curb inflation.

The British pound had been hit by a cautious reception for the Bank of England's announcement Monday of a 50 billion pound ($100 billion) plan to allow banks to swap mortgage-backed securities for Treasury bills. The pound reversed its declines Tuesday, however, rising to $1.9952 from $1.9798. The dollar was down against the Japanese currency, dropping to 103.09 yen from 104.17 yen.

The high euro is bound to cause more pain for European manufacturers who export cars, food, wine and other products to the United States because it means their goods are more expensive.

Airbus, a unit of European Aeronautic Defense and Space Co. announced a general price increase for its aircraft of an additional $2 million per single-aisle aircraft and $4 million per wide-body long range and A380 family aircraft as of May 1, citing the high euro and the cost for raw materials.

German automaker BMW AG has said it will start producing more cars in South Carolina in a bid to take advantage of the cheaper dollar. Volkswagen AG has said it is likely to build a new production plant in the United States, too.

In other late New York trading, the dollar bought 1.0028 Swiss francs, down from 1.0072 francs.