No relief for the sliding dollar

The dollar fell to record lows against the euro and the Swiss franc this week and hit its weakest levels for 2½ years against the yen as speculation mounted that the Federal Reserve would be forced into cutting US interest rates.

Analysts said the relentless flow of negative news from US banks and retailers and the weakening outlook for technology companies weighed on the dollar.

The bearish mood was exacerbated by the Federal Reserve on Tuesday as it expressed concern over the possibility of a sharp downturn in economic growth.

Lee Hardman at Bank of Tokyo-Mitsubishi UFJ said the market was discounting a 90 per cent probability that the Fed will cut interest rates by 25 basis points at its December meeting.

“The dollar will remain under significant downward pressure while speculation persists that the Fed will continue to ease its monetary policy stance,” he said.

While the dollar weakened all week, the move took a decidedly more violent turn Friday as liquidity dried up due to the holidays in the US and Japan.

Indeed, the dollar tumbled to a record low of $1.4966 against the euro and SFr1.0899 against the Swiss franc at one point.

Analysts said holiday-thinned trading conditions provided the ideal opportunity for many of the key underlying trends in the foreign exchange market to extend further.

However, after its slump, the dollar recouped some of its losses Friday as comments from the European Central Bank hit dealing screens. Miguel Angel Fernandez Ordonez, governor of the Bank of Spain and an ECB council member, said world financial turmoil threatened a stronger-than-expected slowdown in the eurozone, while Jean Claude Trichet, ECB president, said “brutal” movements in the foreign exchange market were unwelcome.

Nevertheless, over the week, the dollar fell 1 per cent to $1.4810 against the euro, dropped 1.4 per cent to SFr1.1015 against the Swiss franc and lost 0.2 per cent to $2.0590 against sterling.

The dollar plummeted 2.8 per cent to Y107.90 against the yen on the week, hitting its weakest level since May 2005. The yen also advanced against other currencies. Weakness on global equity markets heightened risk aversion and saw investors shy away from carry trades, in which the low-yielding Japanese currency is sold to finance the purchase of riskier, higher-yielding assets elsewhere.

Analysts said a report from the Organisation for Economic Co-operation and Development had boosted demand for the yen. The OECD said losses caused by the meltdown in the US mortgage market could hit $300bn and that the credit crunch had yet to inflict damage on equity markets.

Over the week the yen rose 1.7 per cent to Y159.85 against the euro, climbed 0.8 per cent to Y222.10 against the pound and gained 5 per cent to Y94.10 and 3.5 per cent to Y81.05 against the higher-yielding Australian and New Zealand dollars respectively.

Meanwhile, the pound dropped to its lowest level in 4½ years against the euro after minutes from the Bank of England’s November meeting showed two of its nine-strong monetary policy committee voted for a cut in UK interest rates.

Analysts expressed surprise that John Gieve, the central bank’s normally hawkish deputy governor, had joined with David Blanchflower, who was alone in voting for a cut in rates at the October meeting.

The pound fell 0.8 per cent to £0.7203 against the euro over the week.