Dollar drops to new lows vs euro
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LONDON, England (Reuters) -- The dollar hit a record low against the euro for a fourth consecutive trading day on Wednesday as investors warmed to the view that a recovering U.S. economy would do little to alleviate the U.S. current account deficit.
Comments that Germany was not worried by the euro's latest surge gave added encouragement to euro bulls who bid the single currency up above $1.2125, bringing its gains to more than 15 percent since the start of the year.
The greenback also hit a fresh five-year low against the British pound, and six-year lows against the Australia and New Zealand dollars.
"We're seeing a degree of capitulation from dollar bulls who had bet that strong U.S. data would fuel a decent dollar correction,'' said Shahab Jalinoos, senior currency strategist at ABN Amro.
"European policymakers appear fairly calm about the euro's rate at the moment and there is little reason to stand in the way of this move.''
A German government source travelling with Chancellor Gerhard Schroeder in Beijing on Wednesday told Reuters that Berlin was not worried about the euro's current rate against the dollar.
This chimed with remarks from Bundesbank Vice President Juergen Stark on Tuesday that the euro's current exchange rate was "not exceptional'' and in line with its long-term average.
Broadly beaten
The dollar also fell below 108.30 yen for the first time in two weeks, with the threat of intervention from Japanese authorities the only factor preventing a sharper decline, traders said.
In contrast to the laissez-faire attitude of European authorities, the Bank of Japan has been buying dollars for yen throughout the year to prevent yen strength choking off Japan's export-led recovery.
The euro's session peak coincided with a key technical level at $1.2125/30, representing the 61.8 percent decline from the euro's synthetic 1995 peak to its 2000 lifetime low. Dealers said a decisive break above this level could trigger more momentum-based buying.
"Some people are talking about technical levels but it's all Star Trek to me. We're going where no one has ever been before,'' said a London-based trader.
No relief from data
A raft of strong U.S. economic data has failed to offer the dollar any sustained relief, with many concerned that rebounding domestic demand will only encourage Americans to suck in more imports. This would only exacerbate the country's huge current account gap, already running at five percent of gross domestic product.
Despite a brightening economic backdrop, most analysts believe the Federal Reserve will keep rates at a paltry one percent until the second half of next year.
"The Fed is in no hurry to raise rates which means returns on U.S. assets are not attractive enough to fund the U.S. current account deficit,'' said Adrian Hughes, currency strategist at HSBC Markets.
"If the Fed doesn't raise rates, the adjustment mechanism will come via a weaker dollar.''
The U.S. ISM non-manufacturing survey, due at 1500 GMT, is expected to show the country's services sector expanded at almost the same breakneck pace in November as it did in October, reflecting strong consumer and business spending.
Rates in focus
Australia's central bank responded to an improving economic picture by raising rates for a second straight month on Wednesday.
The Australian dollar leapt to a new six-year high above US$0.7360 after the rate hike, bringing its gains against the greenback to more than 31 percent since the start of the year.
The New Zealand dollar also romped above US$0.65 for the first time in six years and dealers speculated that the country's central bank may follow suit later on Wednesday.
The market is divided on whether the Reserve Bank of New Zealand will hike rates to cool a red hot housing market or whether it will hold interest rates steady to help exporters at a time when its local currency is galloping higher. The central bank is due to announce its verdict at 2000 GMT.
