Euro Hits New High Against US Dollar

The euro shot to an all-time high against the U.S. dollar Tuesday on concerns about the American economy that were fueled by discouraging growth forecasts from key U.S. retailers and homebuilders.
by Jackie Farwell, BusinessWeek

The British pound, which has been trading around 26-year highs against the dollar, briefly touched $2.0273 after reports showed British consumer prices were rising at a faster pace than the target set by the Bank of England.

The euro hit a new record of $1.3738 Tuesday, its highest level against the dollar since the 13-nation currency started trading in 1999, before retreating to $1.3729. That was still above the euro's previous high of $1.3682 reached on April 27 and the $1.3623 it bought late Monday in New York.

A higher euro makes goods from the 13-nation currency zone more expensive for customers abroad.

Along with the rise in the pound, the stronger euro also makes visits to much of Europe more expensive for travelers from elsewhere and makes shopping trips to the U.S. more appealing to Europeans.

"The dollar is a basket case," said Peter Schiff, president of Euro Pacific Capital Inc. "We are going to pay the piper for years of having the underlying fundamentals of our economy disintegrate beneath our feet."  (continued…)

Given the state of the U.S. economy, he said, the dollar could continue to fall in the coming years against the euro, to $2.50 or even $3.

In late New York trading, the pound was changing hands at $2.0267, up from $2.0151 late Monday in New York. The dollar also fell against the Japanese currency, drifting to 122.03 yen from 123.33 yen.

The dollar bought 1.0512 Canadian dollars, up from 1.0484 late Monday, after the Bank of Canada raised its key rate by a quarter of a percentage point to 4.5 percent on Tuesday.

In other trading, the dollar bought 1.2053 Swiss francs, down from 1.2161.

The dollar's plunge against the euro and pound came as U.S. stocks fell, reacting to forecasts from retailers including Home Depot Inc., Sears Holding Corp. and homebuilder DR Horton Inc. that raised concerns about whether corporate America's growth will give stocks the boost investors have been hoping for.

Adding to the dour news on Wall Street was a move by Standard & Poor's Ratings Service to place credit ratings on 612 classes of residential mortgage-backed securities backed by U.S. subprime collateral under review for a possible downgrade. Subprime mortgage loans are those made to people with questionable debt repayment records.

Also Tuesday, a speech by U.S. Federal Reserve Chairman Ben Bernanke in Cambridge, Mass., offered little insight into the central bank's next move, and instead focused on how the Fed makes its inflation-fighting decisions.

The Fed has left the benchmark rate unchanged at 5.25 percent for a year now, after two years of steady increases.

That contrasts with the European Central Bank, which regularly raised rates and is expected to do so again to 4.25 percent in September; and the Bank of England, which last week increased its benchmark rate to 5.75 percent, a six-year high.

Higher interest rates, a weapon against inflation, can bolster a currency by giving better returns on fixed-income investments.

The euro began its most recent run against the dollar in June after the European Central Bank lifted its benchmark rate to 4 percent. Further increases would be aimed at countering threats of inflation in the euro zone, a bloc of 318 million people that accounts for more than 15 percent of the world economy.

On Tuesday the EU gave Cyprus and Malta final approval to start using the euro, raising to 15 the number of nations that will be using the currency when the two Mediterranean nations join the euro zone on Jan. 1.

Michael Schubert, a currency analyst for Commerzbank, said it was fair to expect the euro "to trade around $1.35 to $1.37 for the short and middle term."

AP Business Writer Matt Moore in Frankfurt, Germany, contributed to this report.

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