TODAYonline

Euro strikes six-month dollar low

Time is GMT + 8 hours
Posted: 2-Sep-2008 19:51 hrs

A euro coin and a US dollar bill. The euro has fallen below the 1.45 dollars level for the first time since February 12 as the market anticipated lower interest rates in the eurozone, with inflation concerns easing amid tumbling oil prices.

The euro on Tuesday slid below 1.45 dollars for the first time since February as the market anticipated lower interest rates in the eurozone, with inflation concerns easing amid tumbling oil prices.

In morning London trade, the European single currency dropped to 1.4484 dollars, the lowest point since February 12. It later improved to stand at 1.4502 dollars, compared with 1.4606 dollars late on Monday in London.

Elsewhere, the yen shrugged off Monday's abrupt resignation of Japanese Prime Minister Yasuo Fukuda, which analysts said was unlikely to bring a major policy shift given the current political deadlock in Asia's largest economy.

The pound meanwhile struck a record low versus the euro for the second day in a row after the British finance minister's bleak assessment of the economy over the weekend.

Sterling also on Tuesday reached the lowest point against the dollar for more than two years.

US markets were to reopen on Tuesday, having shut the day before for the Labor Day public holiday in the United States.

Dealers said financial markets were betting that the European Central Bank would need to consider a cut in interest rates sooner rather than later.

"If oil prices resume their decline the assumption that the ECB will at the very least reverse July's rate hike will mount and weigh further" on the euro, Calyon economist Stuart Bennett said on Tuesday.

For the moment, the European Central Bank was widely expected to leave its main lending rate at 4.25 percent on Thursday despite growing signs of a sharp economic slowdown across the eurozone, analysts said.

The ECB raised its main interest rate in July even though the economy contracted 0.2 percent in the second quarter -- the first time it had done so since the euro's creation in 1999 -- to ensure markets understood it was serious about fighting inflation driven by soaring energy costs.

Inflation in the eurozone eased to 3.8 percent in August, down from a record 4.0 percent in July but still well above the ECB target of just below 2.0 percent.

While oil prices have come off the boil for now, there is concern that wage demands could create a second round of inflation pressures.

Oil traded sharply lower on Tuesday, sliding close to 104 dollars a barrel, after Hurricane Gustav apparently spared key oil facilities in the Gulf of Mexico, dealers said.

The dollar could post further gains as other central banks acknowledge the worsening state of their economies compared with the United States, Chuo Mitsui Trust Bank strategist Yosuke Hosokawa said on Tuesday.

"Markets are focused on the weakness of economies other than the US. There is a widespread view that currencies will further weaken against the dollar," Hosokawa said.

The Bank of England was also expected to leave its key lending rate on hold Thursday but there was growing speculation that it too would be forced to cut borrowing costs before long.

The Australian central bank cut its benchmark rate by a quarter point to 7.0 percent on Tuesday, the first reduction since 2002.

Reserve Bank of Australia governor Glenn Stevens said the decision had been taken because financial conditions had become "quite tight."

"Conditions in international financial markets remain difficult, with heightened concerns over credit persisting," Stevens said.

In London trading on Tuesday, the euro changed hands at 1.4502 dollars against 1.4606 late on Monday, at 157.45 yen (157.99), 0.8121 pounds (0.8111) and 1.6107 Swiss francs (1.6097).

The dollar stood at 108.53 yen (108.18) and 1.1102 Swiss francs (1.1023).

The pound was at 1.7869 dollars (1.8218).

On the London Bullion Market, the price of gold dropped to 804.85 dollars per ounce from 822.25 dollars late on Monday. — AFP