Dollar tumbles broadly; all-time lows in sight

NEW YORK Thu Apr 21, 2011 5:27pm EDT

NEW YORK (Reuters) - The dollar tumbled for a third straight day on Thursday as record low interest rates and the crushing weight of the U.S. budget deficit pushed it closer to an all-time trough against major currencies.

The dollar's slide accelerated days after Standard & Poor's slapped a negative outlook on the United States' top AAA credit rating. The agency said a downgrade was possible if authorities can't slash the massive U.S. budget deficit within two years.

Investors -- from fund managers to foreign central banks that hold trillions of dollars in assets -- reacted by opting for anything but the dollar.

"The combination of loose monetary policy and chaos on the fiscal front has people very worried," said Boris Schlossberg, head of research at GFT Forex in New York. "That fear is being reflected in the dollar."

Mohamed El-Erian, co-chief investment officer of top bond manager PIMCO, which has $1.2 trillion under management, said: "Absent problems elsewhere in the world, history and economics suggest that America's current fiscal and monetary policy stance will put continued pressures on the dollar."

The dollar index, a gauge of the greenback against six advanced country currencies, fell to 73.735 .DXY, its lowest level since August 2008. Analysts said that sets up a possible run toward its record low of 70.698 touched in March 2008.

The euro soared to a 16-month high above $1.46 before easing to $1.4550, while the dollar fell 0.7 percent to 81.89 yen. The Australian dollar rose above $1.07, its highest in nearly three decades, as Australia's 4.75 percent interest rate and its role as a supplier of raw materials to booming Asian markets attracted investors.

Some investors fear a fragile U.S. economic recovery could sputter if the White House and Congress agree to cut the deficit with significant spending cuts or tax hikes. That would likely force the Federal Reserve to hold interest rates at record lows even as other central banks raise them.

"There is no clear sign that the U.S. is going to raise interest rates, and that is causing the dollar to depreciate by the day," said Jonathan Xiong, who helps manage about $30 billion at Mellon Capital Management in San Francisco.

Underwhelming employment and manufacturing data on Thursday underlined the sluggish nature of the U.S. recovery and the difficulty facing the Fed, traders said.

STRONG DOLLAR POLICY?

The European Central Bank raised interest rates this month for the first time since 2008 and is expected to do so again. Investors also expect currencies in China and other emerging markets to rise more quickly as authorities start relying more on stronger exchange rates to offset inflation.

Analysts said the euro was on course for a move toward $1.50 if the current momentum continues, despite the possibility of a Greek debt restructuring.

Talk that China may invest in Spain had investors shrugging off worries for now about euro zone debt.

"I don't think the U.S. is actively seeking a weaker dollar, but they're not unhappy with it either," Brown Brothers Harriman strategist Win Thin told Reuters Insider. "At the margins, it certainly helps exports and helps growth. As long as asset markets hold up, I think they're OK with this."

But some global investors may not keep blindly buying U.S. assets that carry increasingly more risk but persistently low returns.

"At some point along the line, people are going to realize it's absurd to lend money to the United States government at 30 years in U.S. dollars at 3 or 4 or 5 or 6 percent interest," influential investor Jim Rogers told Reuters Insider.

While, the 30-year Treasury bond yield remained historically low at 4.47 percent, debt-strapped euro zone countries such as Greece have to pay nearly four times that just to borrow money for five years.

(Additional reporting by Jennifer Ablan; Editing by Leslie Adler)

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Comments (19)
gAnton wrote:
Let’s see! A weak and falling dollar; gold at an all-time high; oil prices skyrocketing; food prices continuing to rise; stocks reaching record levels; and it seems like commodity and manufactured goods prices are taking off. And the more things you look at and the closer you look at them (bankrupt US states and banks, falling real estate prices, euro country and US sovereign debt crises, civil wars and revolutions in north Africa and the middle east, etc., etc.), the worse it seems.

But not to worry–Bernanke has inflation and the Tea Party Republicans well under control.

Apr 20, 2011 10:35pm EDT  --  Report as abuse
NukerDoggie wrote:
As one economist observed last week, ‘this spring/summer is eerily similar to the spring/summer of 2008′. So, let’s see if the commodities bubble goes BANG! and risk appetite implodes as global investors rush back into short-dated Treasuries for safety. Where else can they go if the largely Fed-instigated commodities bubble bursts again? Someone needs to tell the inbreds at the Fed that if they keep shoving people massively from one side of the row-boat to the other and back again then the damn thing’s gonna tip over.

Apr 21, 2011 10:43am EDT  --  Report as abuse
jrj90620 wrote:
Getting to the point where no one is going to go into the “safety” of govt debt.Finally,even the fools are figuring out that the Dollar and Dollar promises(govt debt), aren’t worth much,when the currency is totally fiat and the govt is broke.

Apr 21, 2011 12:32pm EDT  --  Report as abuse
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