Recent falls in the dollar could have profound consequences for the world economy, currency analysts warned yesterday, despite the US currency staging a modest recovery after coming within touching distance of historic lows on Wednesday. Marc Coleman, Economics Editor, reports.
The dollar rose to $1.3585 against the euro, but analysts warned that new data due for release today could prompt it to fall again.
The Federal Reserve's trade-weighted exchange rate - a measure that assesses the dollar's value against a comprehensive basket of the world's leading currencies - reached its lowest level since 1973 on Wednesday, following almost continuous falls in the dollar since the start of last year.
Fears that the US economy is underperforming relative to Asia and Europe have combined with worries about the state of the US property market. By Wednesday the euro was worth just over $1.36, the dollar's weakest position since December 30th, 2004, when the euro reached a record high of $1.3670.
"The dollar's rebound is more technical than anything else since from a fundamental perspective, nothing has changed," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto. "The underlying trend for a weaker US dollar is very much in place."
Ashraf Laidi, chief currency analyst at CMC Markets in New York, said: "The market is taking advantage of this lull to buy back the dollar before taking the euro past its all-time high.
"Dealers are regrouping so that the next time the euro goes up, it will have a better chance of breaking above the new high. These retreats and declines in the euro are actually very healthy in making this rally stable."
The dollar could fall below its all-time low tomorrow when the US government releases a preliminary estimate of GDP growth in the first quarter of this year.
Expectations are for annual growth of 1.8 per cent but Laidi warned this expectation could be disappointed. "Another sub-par GDP reading will hurt the dollar."
Neil MacKinnon, chief economist at ECU Group, a London-based hedge fund with $1.3 billion of assets under management, said a sharp fall in the dollar would raise US inflation and interest rate rises, thereby harming the global economy.
