Dollar plunges through $1.40 against euro

By Peter Garnham

Published: September 20 2007 11:22 | Last updated: September 20 2007 11:22

The dollar dropped to record lows through the $1.40 level against the euro on Thursday as the US currency continued its slide following the Federal Reserve’s decision to cut interest rates earlier in the week.

“The key $1.40 level has been breached and dollar weakness is evident across all currency pairs reflecting the prospect of a move in interest rate differentials against the currency,” said Derek Halpenny at Bank of Tokyo-Mitsubishi.

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The euro’s rise through the psychologically important $1.40 barrier - seen as pain barrier for eurozone exporters - triggered a flurry stop-loss buying, sending the single European currency higher across the board.

The euro rose 0.5 per cent to $1.4035 against the dollar and by 0.4 per cent to £0.7006 against the pound – its highest level since January 2005. It gained 0.2 per cent to Y162.20 against the yen.

Meanwhile the dollar fell 0.2 per cent to $2.0050 against the pound, 0.4 per cent against the yen to Y115.55 and 0.6 per cent to a fresh 30-year low of C$1.0090 against the Canadian dollar. It also lost 0.9 per cent to SFr1.1739 against the Swiss franc.

David Woo at Barclays Capital said as the US economy slowed down, it would become more difficult for the US to attract financing for its current account deficit.

“This increases the risk of a disorderly adjustment of global imbalances in which the dollar is likely to perform very poorly,” he said. “With euro/dollar now having broken above $1.40, the market is likely to price in this risk through higher volatility.”

Analysts said the move in euro/dollar through $1.40 would also prompt a rise in political comment on currency issues.

“With the dollar moving to some sensitive levels, currency politics are likely to return to the agenda in the last quarter of this year,” said Simon Derrick at Bank of New York Mellon.

He said that after recent comment from Nicholas Sarkozy, the French president, it would not be surprising to hear more comments from within the eurozone on the impact of the strong euro on the region’s exporters.

Meanwhile, he said tensions between the US and China were also set to rise ahead of the launch of the country’s sovereign wealth fund, which is intended to maximise returns on $200bn of China’s $1,330bn dollar stockpiles.

Analysts said the launch of the fund might speed up the diversification of China’s reserves away from the dollar, piling more pressure on the currency.

“With $200bn to play with, there will be heightened speculation on what they will spend their money on,” said Mr Derrick.

Hans Redeker at BNP Paribas said Saudi Arabia, which is also sitting on significant dollar stockpiles, was also going to be in the spotlight since it did not follow the Fed in cutting interest rates, even though the Saudi riyal is pegged to the dollar.

He said it was understandable that Saudi Arabia was not following the Fed’s lead, given the rising inflationary pressure within its overheating and oil price supported economy, but the country would have to tighten fiscal conditions - which was unlikely to happen.

“The currency peg will come under increasing pressure the more economic fundamentals of the region diverge from the recessionary US environment,” he said.