Dollar slumps as data points to slowing U.S. growth

Kevin Plumberg
Reuters
Tuesday April 23, 2007

The dollar fell on Tuesday to a two-year low against a basket of major currencies after soft data on housing and consumer confidence underscored a trend of slowing U.S. economic growth.

Reports on existing-home sales and consumer sentiment both came in lower than expected and pushed the dollar down against the basket for the 10th time in the past 11 sessions. The dollar also dropped closer to a record low against the euro.

The currency may be entrenched in a long-term weakening trend, analysts said, given a spate of anemic U.S. economic numbers that has bolstered expectations the Federal Reserve will cut interest rates this year.

"The Fed will need to cut interest rates some time this year to jump-start the economy. I wouldn't be surprised to see the dollar testing its all-time lows against the euro once again this week," said Greg Salvaggio, vice president for currencies at Tempus Consulting in Washington.

By late afternoon, the euro rose 0.4 percent from late Monday to a two-year high of $1.3644, creeping closer to its all-time high of $1.3670, according to electronic platform EBS. Against the yen, the dollar was mostly unchanged at 118.57 yen

(JPY=: Quote, Profile, Research).

The dollar index dropped to a two-year low of 81.442 (.DXY: Quote, Profile, Research). A move below 80.390 would mark its lowest since April 1995, according to Reuters data.

In tandem with the dollar, yields on 10-year U.S. Treasuries (US10YT=RR: Quote, Profile, Research) closed at 4.6222 percent, the lowest since March 30, offering foreign investors less of an incentive to buy U.S. debt.

U.S. short-term interest rate futures rose on Tuesday, reflecting increased expectations of a Fed rate cut later this year. After the economic data, the implied possibility of a cut by mid-year remained low at 12 percent, compared with 10 percent on Monday, but prospects for easing in the third and fourth quarter advanced more strongly.

Investors will get a flavor of how the U.S. manufacturing sector is faring, along with more data on the housing sector, with Wednesday's release of March durable goods orders and new-home sales data.

"Expect some caution ahead of U.S. data tomorrow, which are expected to show better readings, but any signs of better numbers from the United States will have limited impact as long as the housing market remains under a cloud and the market holds out hope for a Fed rate cut sometime down the road," said Jay Meisler, principal of Global-view.com, an online forum for investors and dealers.

The dollar has weakened considerably in the past year, falling to 26-year lows against sterling and two-year lows against the euro, mainly because of slowing U.S. economic growth at a time when other major economies are still showing signs of robustness.

Investors are expecting the Fed to cut interest rates at least once this year, while higher rates are forecast in other major economies, such as the euro zone and Britain.

The Australian dollar was one of the biggest movers of the day, falling as low as US$0.8234, according to Reuters data, the lowest in nearly two weeks. Its decline followed benign inflation numbers in Australia. It traded at US$0.8268 (AUD=: Quote, Profile, Research), down 0.6 percent on the day. Against the yen it was off last week's decade highs above 100 yen (AUDJPY=R: Quote, Profile, Research).

Australian short-term interest rates plunged as prospects for a rate tightening at next week's Reserve Bank of Australia policy meeting dimmed. Benchmark Australian interest rates are at 6.25 percent.

The sharp decline in the Australian dollar sparked a small unwinding in carry trades, in which investors borrow low-yielding currencies to buy higher-returning assets elsewhere. The U.S. dollar fell 0.7 percent against the low-yielding Swiss franc to 1.2013 francs (CHF=: Quote, Profile, Research).