October 31, 2007 / 12:29 AM / 13 years ago

Dollar drops to record low after Fed rate cut

NEW YORK (Reuters) - The dollar fell to a record low against the euro on Wednesday after the Federal Reserve cut its benchmark interest rate by a quarter percentage point and said the pace of U.S. economic growth will slow this year.

Pedestrians' reflections are seen on a foreign currency exchange board in Sydney October 29, 2007. REUTERS/Mick Tsikas

Even though Fed policymakers said in a statement that inflation risks are now roughly equal to the possibility of slower growth, the weight of negative sentiment on the dollar was enough to lift the euro to an all-time high for the fourth consecutive session. It briefly pushed above the psychologically important $1.45 level.

“It will take more than the Fed effectively making statements to change the broader trend of dollar weakness,” said Flavia Cattan-Naslausky, currency strategist with RBS Greenwich Capital in Greenwich, Connecticut.

“It will need strong data rather than words to squeeze positions,” she wrote in a note.

The euro jumped to $1.4504, a record high, according to Reuters data, and up nearly 10 percent so far this year. It later settled back at $1.4466, up 0.2 percent on the day.

The euro’s gains were broad and deep, rising more than 1 percent against the yen to 167.29 yen.

The Fed’s somewhat benign inflation outlook contrasted with an official estimate that euro zone consumer inflation in October was well above the European Central Bank’s target, increasing the likelihood of higher interest rates there.

The dollar index .DXY, a measure of the U.S. currency’s value against a basket of major currencies, fell to a record low of 76.465. The index was down 1.6 percent in October, contracting for the fourth month in the last five.

“With the housing situation the way it is, the Fed cannot take a chance of getting behind the curve with employment because in a levered situation that could worsen the housing situation,” said Doug Roberts, chief investment strategist at Channel Capital Research in Shrewsbury, New Jersey.

“The dollar at this point probably continues going down.”

The Fed decision to take the fed funds rate down to 4.5 percent and accompanying statement apparently did not alter two long-standing trends in the foreign exchange market: a weakening dollar and firming commodity-related currencies.

In fact, among major currencies, the Canadian dollar and the Australian dollar have been the biggest gainers on the U.S. dollar since a crisis in the risky U.S. subprime mortgage market began to spread to other areas of the economy in mid-August. Both have risen more than 12 percent since then.

The Canadian dollar climbed to a fresh 47-year high as oil prices rose to a record high above $94 a barrel. The Canadian currency was up around 4.8 percent in October, rising for the eighth month out of the last nine. The U.S. dollar fell 0.6 percent to C$0.9460.

The Australian dollar rose to a 23-year high at $0.9338 and was up 4.9 percent in October

Sterling rose against the dollar to a 26-year high at $2.0822, up 0.8 percent.

The medium-term outlook for the dollar is largely dependent on expectations about the federal funds rate, which in turn are based on incoming U.S. economic data, and focus in the market quickly shifted to Friday’s October U.S. employment report.

Additional reporting by Walker Simon and Nick Olivari

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