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Euro Hits New High Against U.S. Dollar
Euro Soars to New High Above $1.37 Amid Worries About U.S. Economy

Associated Press | July 10, 2007
Matt Moore

FRANKFURT, Germany (AP) -- The euro soared to an all-time high against the U.S. dollar on Tuesday, topping the $1.37 mark as key U.S. retailers and homebuilders lowered their growth forecasts, causing more concern about the American economy.

The British pound, which has been trading around 26-year highs against the dollar, briefly touched $2.0273 after reports said that gains in British consumer prices are above the Bank of England's target in the past year, but that inflation was dropping back sharply.

A higher euro makes goods from the 13-nation currency zone more expensive for customers abroad, or cuts into manufacturers' profits if they try to keep the U.S. dollar price of products constant.

Along with the rise in the pound, the stronger euro also makes visits to much of Europe more expensive for travelers from elsewhere and makes shopping trips to the U.S. more appealing to Europeans.

"The dollar is a basket case," said Peter Schiff, president of Euro Pacific Capital Inc. "We are going to pay the piper for years of having the underlying fundamentals of our economy disintegrate beneath our feet."

Given the state of the U.S. economy, he said, the dollar could continue to fall in the coming years against the euro to $2.50 or even $3.

The euro hit a new high of $1.3738 before falling back to $1.3718, above the euro's previous high of $1.3682 reached on April 27 and above the $1.3623 it bought late Monday in New York.

In late European trading, the pound was changing hands at $2.0240, up from $2.0151 late Monday. The dollar was also lower against the Japanese currency, drifting to 122.10 yen from 123.33 yen.

The U.S. dollar was trading at 1.0509 Canadian dollars, compared to 1.0484 late Monday in New York, after the Bank of Canada raised its key overnight rate by a quarter of a percentage point to 4.5 percent on Tuesday.

The dollar's plunge against the euro and pound came as U.S. stocks fell, nervously awaiting a speech later Tuesday from U.S. Federal Reserve Chairman Ben Bernanke and reacting to forecasts from retailers such as Home Depot Inc., Sears Holding Corp. and homebuilder DR Horton Inc. that raised concerns about whether corporate America's growth will give stocks the boost investors have been hoping for.

Adding to the dour news on Wall Street was a move by Standard & Poor's Ratings Service to place credit ratings on 612 classes of residential mortgage-backed securities backed by U.S. subprime collateral under review for a possible downgrade. Subprime mortgage loans are those made to people with questionable debt repayment records.

Any indication from Bernanke that he believes price pressures are rising could heighten worries about a possible interest rate increase and give the stock market a jolt. The Fed has left the benchmark rate unchanged at 5.25 percent for a year now, after two years of steady increases.

That contrasts with the European Central Bank, which has been raising rates regularly and is expected to do so again to 4.25 percent in September; and the Bank of England, which last week increased its benchmark rate to 5.75 percent, a six-year high.

Higher interest rates, a weapon against inflation, can bolster a currency by giving better returns on fixed-income investments.

The euro rose from a low of 82 U.S. cents in October 2000 to its previous high in April of $1.3682 on concerns over the enormous U.S. trade and budget deficits.

But a string of rate increases by the Fed had helped cushion the decline of the dollar.

The euro began its most recent run against the dollar in June after the European Central Bank lifted its benchmark rate to 4 percent. Further increases would be aimed at countering threats of inflation in the euro zone, a bloc of 318 million people that accounts for more than 15 percent of the world economy.

On Tuesday the European Union gave Cyprus and Malta final approval to start using the euro, raising to 15 the number of nations that will be using the currency when the two Mediterranean nations join the euro zone on Jan. 1.

Michael Schubert, a currency analyst for Commerzbank, said it was fair to expect the euro "to trade around $1.35 to $1.37 for the short and middle term."

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