The greenback has taken another lurch downwards, hitting a record low of almost $1.53 against the euro and undershooting the ¥103 mark for the first time in three years. The dollar index, tracking its progress against a basket of six trading partners’ currencies, has dwindled to the lowest level since its inception in 1973.
The slide began amid deepening gloom on US prospects and Fed chairman Ben Bernanke’s suggestion that he would continue to cut rates even though inflation has jumped. Meanwhile, the hawkish European Central Bank looked unlikely to cut rates for some time with inflation stuck at a 14-year high of 3.2%.
Until recently, the dollar had been supported by the hope that aggressive rate cuts would boost the economy and the currency. But now it “is being damaged across the board on the notion that ultra-low interest rates at the expense of escalating inflation is the only way forward”, says Ashraf Ladi of CMC Markets.
Foreign investors appear to be losing some of their faith in the Fed and worrying that inflation will erode the value of dollar assets. Under these circumstances, investors turn to hard assets, as independent economist Philip Verleger told the International Herald Tribune (witness the surge in oil prices to a new record above $103 a barrel, and gold’s latest upswing). With the difference in interest rates between the eurozone and the US looking unlikely to change soon and confidence in the dollar falling, the currency seems unlikely to rebound significantly in the near future.