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Dollar at record low against euro

BBC | September 12, 2007

The US dollar has fallen to a record low against the euro as investors bet that the Federal Reserve will cut interest rates to help the economy.

The US dollar dropped to $1.388 per euro, passing the previous record of $1.3852 that was set on 24 July.

Many analysts are predicting that the Fed will cut interest rates next week as it looks to reassure markets and consumers amid a global credit crunch.

The dollar has weakened against the euro for six sessions in a row.

"The market's main focus remains on US economic fundamentals," said Tomohiro Iwata of Goldman Sachs.

He added that investors would be debating whether the Fed would cut rates by a quarter or a half of a percentage point, and what comments they might make following any move.

Rate spread

At the heart of the dollar's decline have been problems in the US housing market, caused by the Fed increasing interest rates in order to slow accelerating inflation.

As a result of the higher borrowing costs, an increasing number of borrowers have defaulted on loans, especially in the sub-prime mortgage market, which specialises in lending to people with poor or non-existent credit histories.

This, in turn, has spread to global credit markets, as many of the sub-prime mortgages were repackaged and sold on to European and UK banks as investment assets.

Analysts are now speculating that the Fed will cut its main interest rate to ease the pressure on consumers, and help reassure the global markets that it is willing to intervene to ensure financial stability.

The Fed's main interest rate is currently at 5.25% and any cut would be the first in four years.

At the same time, there is speculation that European rates may rise as the region's economy grows by more than 2% this year.

On Tuesday, Jean-Claude Trichet, the president of the European Central Bank, said once again that the European economy was healthy.

However, he warned that market volatility could continue.

"We have seen a distinct possibility that the ongoing deterioration of credit worthiness of borrowers in the US sub-prime mortgage market could be a trigger for a more broad-based market correction," he said.

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