The Wall Street Journal-20080115-Dollar Drops on Rate Outlook
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Dollar Drops on Rate Outlook
The dollar hit a record low against the Swiss franc yesterday and declined versus the euro as investors worried over the likelihood of more Federal Reserve rate cuts and further economic fallout from the U.S. subprime-mortgage mess.
The euro climbed to a seven-week intraday high against the dollar at $1.4915, putting it less than a cent from its record high of $1.4968. The dollar was at 1.0925 against the Swiss franc from 1.1017.
"The Swissie is such a haven in times of uncertainty, so to see it strengthen again now is not too surprising," said Carl Forcheski, vice president of foreign exchange at Societe Generale in New York.
Most of the dollar's sharp losses occurred during the Asian and European sessions.
The dollar caught a slight break during the data-light North American session as U.S. stock markets traded firmly in positive territory. That permitted some risk appetite to creep back into currency markets, allowing the dollar to reduce part of its overnight losses.
"The dollar is following the fortunes of the U.S. stock market, and so as stocks regained some footing [yesterday], so did the dollar," said Sophia Drossos, currency strategist at Morgan Stanley.
Looking at the dollar's overall performance and expectations of weak U.S. data later in the week, Drossos said, "The dollar clearly remains vulnerable. There is much uncertainty."
A key factor keeping the dollar on the ropes is the expectation the Fed will aggressively cut interest rates at its Jan. 29-30 meeting in an effort to forestall a sharp economic downturn. Lower interest rates can reduce the dollar's appeal to investors looking for high returns.
Investors are also worried that U.S. banks will report woeful fourth-quarter earnings next week, which could shake up stock markets and keep the dollar under pressure.
Monday afternoon, the euro was at $1.4871, up from $1.4778 late Friday. The dollar was at 108.19 yen, down from 108.99. The euro was at 160.889 yen, down from 161.068. The United Kingdom pound was at $1.9566, up slightly from $1.9565.
Drossos said the dollar will be especially susceptible to weakness against the yen and the Swiss franc in the near term as investors try to gauge the state of the U.S. and global economies. "With this uncertainty overhang, investors who short the dollar [bet on its weakness] are more likely to do so against...the yen and the Swiss franc," she said.
The dollar also fell against the yen, hitting a seven-week low of 107.37 yen before paring some of its losses.
The next test for the dollar comes this morning, when the U.S. Commerce Department releases retail sales data for December. Economists are expecting sales to fall by a slight 0.1% on the month. But with forecasts for weakness already priced in, dollar-selling might be somewhat restrained even if the data comes in on the downside, analysts said.
Sterling declined on concerns the U.K. economy is running into the same headwinds facing the U.S.: troubled housing and financial sectors.
