Dollar Falls to Record Low Versus Euro as Fed Signals Rate Cuts

The dollar fell to the weakest ever against the euro and to a three-year low versus the yen after Federal Reserve officials signaled they will keep cutting interest rates to support the economy.

The U.S. currency dropped 2.4 percent this week against the euro, the most since December, after Fed Chairman Ben S. Bernanke said he ``will act in a timely manner'' to spur growth and cited the weaker currency's role in improving the trade deficit as a ``positive'' for the economy. The U.S. Dollar Index, which tracks the currency against six major counterparts, sank to the lowest since its start in 1973.

``U.S. policies are pointing to a weaker dollar,'' said Axel Merk, who helps manage the $294 million Merk Hard Currency Fund in Palo Alto, California. ``People don't have confidence in the dollar.''

The dollar ended yesterday at $1.5179 per euro, after touching $1.5239, the cheapest since the common currency's inception in 1999. The U.S. currency tumbled 3.2 percent this week to 103.74 yen, and touched the weakest since March 2005.

The U.S. currency lost 2.1 percent against the euro last month, the most since September. The euro is 30 percent above its debut level of about $1.17 in 1999, and is up 84 percent from an all-time low of 82.30 U.S. cents in 2000.

After trading between $1.43 to $1.49 per euro since November, the dollar decline gained momentum when Fed Vice Chairman Donald Kohn said on Feb. 26 that credit-market turmoil posed a ``greater threat'' than inflation. The comments drove the euro above $1.50 for the first time.

`Some Improvement'

The dollar fell past $1.51 on Feb. 27 after Bernanke told a House panel policy makers said the Fed is ready to act to insure against ``downside risks'' to the economy. The U.S. currency continued its slide the next day after Bernanke told a Senate panel the dollar's decline has resulted in ``some improvement'' in the trade deficit. Treasury Secretary Henry Paulson reiterated on Feb. 28 he favors a strong dollar.

``The Fed is breaking new ground in expressing indifference to the U.S. dollar's decline,'' analysts led by Daniel Tenengauzer, New York-based head of global currency strategy at Merrill Lynch & Co., wrote in a research note yesterday. Merrill forecasts the euro to ``peak'' at $1.57 around the end of March.

The U.S. currency has dropped 13 percent versus the euro in the past year as subprime-mortgage losses, the worst housing market in 25 years and soaring credit costs spurred the Fed to cut rates five times since Sept. 18.

Manufacturing Contracts

Reports next week may show U.S. manufacturing contracted last month, while the jobless rate rose. The Institute for Supply Management's manufacturing index probably fell to 48, from 50.7 the previous month, the Tempe, Arizona-based group will say on March 3, according to the median forecast in a Bloomberg News survey. The unemployment rate probably rose to 5 percent in February, from 4.9 percent in January, according to the median forecast in a separate Bloomberg survey.

The chances of a 0.75 percentage point Fed cut to 2.25 percent on March 18 rose to 72 percent yesterday, from 2 percent a week earlier, according to futures on the Chicago Board of Trade yesterday. The balance of bets is on a half-point reduction.

The European Central Bank will keep its main interest rate at 4 percent, the highest level since 2001, at its policy meeting on March 6, according to the all 54 economists in a Bloomberg News survey. ECB President Jean-Claude Trichet said on Feb. 28 ``price stability is a necessary condition'' for ongoing economic expansion.

At 1.64 percent, the two-year U.S. Treasury yielded 1.52 percentage points less than the same-maturity German government bund. The gap was the most since 2002.

Australian Dollar Gains

The Australian dollar climbed to 94.98 U.S. cents on Feb. 28, the strongest since 1984. The Reserve Bank of Australia will probably raise its benchmark rate a quarter-percentage point on March 4 to 7.25 percent, according to the median forecast in a survey by Bloomberg News.

The New Zealand dollar rose to 82.13 U.S. cents on Feb. 27, the highest since the currency was allowed to trade freely in 1985.

The U.S. Dollar Index traded on ICE Futures in New York, which tracks the currency against six major counterparts, declined to 73.56 yesterday, the lowest since it started in 1973.

Latin American currencies also surged this week, with Brazil's real reaching the highest in almost nine years.

Buffett's Currency Investments

Billionaire investor Warren Buffett's Berkshire Hathaway Inc. said yesterday its only ``direct'' currency investment last year was in the real against the dollar. Direct currency positions generated $2.3 billion of pretax profits over the past five years, the company said.

``We will attempt to further increase our stream of direct and indirect foreign earnings,'' the Omaha, Nebraska-based company said in its annual report.

The U.S. currency's decline has made U.S. goods cheaper abroad, boosting exports to a record and shrinking the nation's trade deficit last year for the first time since 2001. It can also make it less attractive to hold onto U.S. assets. Foreign holdings of U.S. stocks, notes and bonds rose a net $56.5 billion in December, slowing from an increase of $90.9 billion in November, Treasury Department data showed last month.