Dollar dives as US slump spreads

By Ambrose Evans-Pritchard and Joe Moulds
Last Updated: 3:38am BST 19/10/2007

The dollar has plummeted to all-time lows against both the euro and a basket of global currencies amid growing fears of a disorderly rout as the US property slump spreads to the broader economy.


The greenback dived after the US 'Philly' business index dropped 10.9 to 6.8 in October, with a shock fall in new orders and inventory, raising the chances of further rate cuts by the Federal Reserve this month.

The dollar crossed the barrier of $1.43 against the euro; the broader dollar index fell to 77.478, the lowest since the series began in 1973.

The plunge follows data released this week by the US Treasury showing a record $163bn (£80bn) exodus from all forms of US assets, led by unprecedented levels of US bonds sales by Japan, China and Taiwan.

Bundesbank chief Axel Weber gave the euro an extra lift by hinting strongly at more rate rises in Europe to head off inflation, expected to reach 2.6pc in Germany.

The growing belief the European Central Bank may keep tightening despite the credit crunch has caused traders to shift gear, renewing bets on the euro. But the surging currency has hit confidence in Europe, where industries in France, Italy and some German firms are warning of serious knock-on effects.

Airbus says each one cent move costs the group $100m in profits.

Ernest-Antoine Seilliere, head of the EU-wide lobby BusinessEurope, called for "political intervention" by the G7 club of economic powers at today's meeting in Washington.

Rodrigo Rato, head of the International Monetary Fund, offered little hope of relief. "Our view regarding the euro is that the euro stays in line with medium-term fundamentals on a multilateral basis. It is true the euro is close to historic highs in real terms, but it is also true the euro-area current account is in broad balance," he said.

French president Nicolas Sarkozy has called for EU action to force a shift in exchange rate policy, if necessary by strong-arming the ECB to halt its campaign of rate rises.

Germany has a huge trade surplus, but France faces the biggest deficits in its history. Spain's current account deficit is 9pc of GDP.

The US has adopted a policy of benign neglect towards the dollar slide, seeing it as a way to correct a huge current account deficit, but there are now concerns the process may be getting out of hand.

The Manufacturers Alliance/MAPI said in its quarterly outlook the soft dollar was complicating life for America's key trading partners and risked triggering a global slowdown. "Global sentiment against the dollar is gaining traction, generating daunting challenges for the short-term economic outlooks of major US trading partners."

Mitul Kotecha, an economist with Calyon, said: "The United States will do no more than repeat that markets determine exchange rates and will oppose any sort of intervention. There is every chance the aftermath of the G7 meeting will see the dollar resume its weakness."

Paul Robinson, an analyst at Barclays Capital, said the prospect of Fed rate cuts had knocked away a key prop for the dollar, warning it could slide to $1.50 against the euro.