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Thu, Sep 13, 2007 - Page 10 News List

Euro hits new high on expectations of a US Fed rate cut


The euro hit a new all-time high against the US dollar yesterday, climbing as high as US$1.3878 amid speculation that the US Federal Reserve would soon cut interest rates.

The 13-nation euro broke through its previous record of US$1.3852, reached in July. By early morning in Europe, it had settled back slightly to US$1.3867.

The US dollar, which has hovered within a few cents of its record low over recent weeks, has come under new pressure since the US Labor Department on Friday issued unexpectedly poor jobs data last month.

That report strengthened speculation that the Fed would cut interest rates at its meeting next Tuesday. A cut from the current rate, 5.25 percent, would be the first reduction in four years.

Lower interest rates, used to jump-start the economy, can weaken a currency by giving investors lower returns on investments denominated in it.

Most economists expect the Fed to ease credit policy. The debate has shifted to how much -- a quarter or a half percentage point.

Fed Chairman Ben Bernanke offered no hints on the Fed's intentions during a speech in Berlin on Tuesday. He did not address the future course of interest rates in the US nor the state of the US economy.

On Wall Street, investors also felt more confident about the prospects of a rate cut and pushed stocks up. The Dow Jones industrial average gained 180.54 points to close at 13,308.39 on Tuesday.

In the speech, Bernanke said that the US and other countries must work together to right a skewed pattern of trade and investment around the globe, a move that would help worldwide economic stability.

So-called "global imbalances" occur when countries such as the US run up bloated trade deficits, while other countries, such as China and oil-producing nations, produce big trade surpluses.

As for prospects of fixing the problem, Bernanke said: "Signs of progress have appeared but ... most countries have only just begun to undertake the policy changes that will ultimately be needed."

Widening interest rate differentials mean that currency investors can reap higher returns from the euro rather than the struggling dollar.

"The dollar is under significant pressure ... the main drivers of dollar weakness appear to be collapsing short-term interest rate differentials as markets look to a series of reductions in the Fed funds rate and a related rise in risk appetite," HBOS analyst Steve Pearson said yesterday.

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