Tuesday, July 10, 2007

Dollar Reaches New Lows

Reports indicating weakness in housing and retail sales in the U.S. today sent the U.S. dollar to a new all-time low against the euro and multi-year lows against many other currencies including the Swedish krona, the U.K. pound, the Australian dollar and the Chinese yuan. It even fell against the yen, although in a longer perspective, the yen has been even weaker than the U.S. dollar.

With interest rates movements going against the dollar and with rising oil prices likely to prevent reductions in the trade deficit, look for the dollar to fall further against most currencies, but not that dramatically though. I expect it to test the 1.40 level against the euro fairly soon. At that point, however, further appreciation is likely to be limited due to discontent from Sarkozy and other EU leaders that complain that the euro is too strong. Also, if the euro rise too much against the dollar and the yen, it could further delay future rate hikes from the ECB. And as the increase in interest rates is the driving factor behind the strength of the euro, a dramatic appreciation in the euro could prove to be another case of self-preventing prophecies.


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