Dollar at a record low versus euro

Source: Stock Market Digital

Date :12/09/2007 09:36:21

The US dollar has fallen to its lowest ever rate against the euro following expectations that the US Federal reserve is considering interest rate cuts.

Amid speculation on the part of investors that the Fed will cut interest rates next week to bolster up the US economy, the dollar fell to €1.388: its previous low against the European currency was $1.352 per euro, reached on July 24.

The principal reason for the decline has been the volatility in the American housing market driven by lending to the ‘sub-prime’ market or housebuyers with a poor credit history, and who have run into trouble as interest rates have been raised in order to control inflation.

If interest rates, currently standing at 5.25 percent, are cut next week it would be the first time this has happened for four years. However as the European economy grows, there is speculation that interest rates there could rise.

Speaking yesterday the President of the European Central Bank, Jean-Claude Trichet said the European economy was fundamentally healthy, though he cautioned that the market could continue to adjust for some time. “We are now in a correction phase which can, as frequently observed in such situations, comprehend episodes of hectic behaviour, a high level of market volatility and elements of over-shooting.

“We had seen a distinct possibility that the ongoing deterioration of the creditworthiness of borrowers in the US sub-prime mortgage market could be a trigger for more broad-based market correction. We had said this in our Financial Stability Review published as recently as last June. The most important channel for the propagation of the correction turned out to be the maturity mismatch and, therefore, the strains placed on the balance sheets of special purpose vehicles and conduits which had funded medium-term positions in asset backed securities - where sub-prime mortgages were an important element - with short-term financing commercial papers. It was the difficulties these vehicles faced in rolling over their short-term funding which created much of the strains we saw in money markets,” he said.

September 12 2007