Currencies Rally as the US Dollar Slides
By Kai Sandvig, Business Editor
Posted October 15, 2007
The value of the US dollar continues to slide against
other benchmark currencies, including a more valuable Canadian
In currency spot trading early Monday, the euro rose to
$1.4231 and the British pound rose to $2.0408. The euro has
risen 2.6 percent since Sept. 18, when the Federal Open Markets
Committee (FOMC) cut the US overnight lending rate from 5.25
percent to 4.75 percent. The Canadian dollar has risen to $1.028
after reaching parity with the greenback for the first time
The FOMC passively cited a poor US housing market
alongside an explicit statement of lower inflation in its action
of slashing 50 basis points, the first Fed cut since 2003 when
Fed officials allowed a gradual rate increase to help thwart
inflationary pressures on the US economy.
Euro-zone economic policy makers have called for halt in
the rise of the euro against the US dollar in recent days in
order to maintain lower export costs from the Euro-zone.
However, exports from the region have grown and the European
Central Bank (ECB) may raise its rates, precipitating a further
Seeking further enlightenment on the subject from Moody's
Corp. Senior Economist, Matthew Cairns, responded to a list of
email questions for The European Weekly Online.
“Broadly speaking, this is an interest rate differential
story,” Cairns wrote. “As the Fed reached the peak in its cycle
and then opted to cute on the back of weaker economic prospects,
the euro continued to rise.”
“The ECB may not be done hiking, thus offering investors
the potential for additional yield,” Cairns wrote.
“As the Fed opted to cut rates in order to stabilize
markets, expectations and growth, the lower Fed Funds rate, used
to stimulate the economy, has weakened the US currency by giving
investors lower returns on their investments denominated in the
US currency,” Cairns wrote.
Many positive aspects of a less valuable US dollar have
been widely noted, such as lower export prices, but US bound
import prices have received little attention in economic dialog.
The US imports durable goods and commodities such as automobiles
and oil that are vulnerable to whimsical change in price, such
as oil prices attaining an all-time high of around $85 per
barrel for oil in Monday trading.
“Should the prevailing interest rate and growth
differentials hold over the coming months, the dollar's weakness
will put upward pressure on import prices,” Cairns wrote.
“Petroleum prices have dictated the magnitude and
direction of import price growth over the past few months. This
trend will persist as crude oil prices are currently trading at
or near record highs. If these gains are sustained, high crude
oil prices will put upward pressure on import prices in
September,” Cairns wrote.
The Euro-zone will also experience economic ramifications
due to a stronger euro.
“The stronger euro is likely to affect exports over time,
but at present, the currency is helping Euro-zone firms buy raw
commodities and other inputs on international markets at a
cheaper rate,” Cairns wrote.
In light of the sliding US dollar, Cairns believes the
currency will maintain its importance as a benchmark currency.
“The dollar has been subject to sharp swings in fortune
for many years. This is not the first time the dollar has been
hit and given the size of the US economy, the strength of its
consumer base and success of its firms, the dollar's 'value' as
a benchmark currency will not be harmed,” Cairns wrote.
Kai Sandvig can
be reached at email@example.com
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