The dollar fell yesterday as expectations of moderating US inflation, a sluggish housing market and moderate growth prospects revived the possibility of interest rate cuts later in the year.
By midday in New York, the euro was up 0.2 per cent to $1.3810. Earlier, the dollar had wilted as markets were rocked again by investor worries about the fallout from problems in the subprime mortgage sector. The dollar hit a new low of $1.3833 against the euro, and a 26-year low against the pound at $2.0548.
Equity markets slumped, while the flight to safety lifted government bonds after Bear Stearns, the US investment bank, declared its two subprime-focused hedge funds were "virtually worthless".
Ben Bernanke, chairman of the US Federal Reserve, said yesterday that the closely watched core inflation data - which leaves out the volatile food and energy prices - had moderated over the past few months, though underlying price pressures remained a concern for the central bank.
His comments came as consumer price inflation (CPI) data showed core inflation rising 0.2 per cent month-on-month to an annual 2.2 per cent, as expected.
"Core CPI is at its lowest level in 15 months, lending further support to the Fed's case that slower growth will bring elevated core inflation back in line with price stability without resorting to higher rates," said Michael Woolfolk at Bank of New York.
Mr Bernanke said the pace of US home sales was expected to remain sluggish for some time.
Separate data yesterday recorded a month-on-month rise in starts on new homes in June. The figure was helped by a downward revision of the May figure.
