The dollar dropped to a record $1.22 against the euro and fell to its lowest in more than a decade versus the British pound Monday on speculation the Federal Reserve will keep interest rates at a 45-year low in coming months, eroding the appeal of U.S. investments.
Fed policymakers on Tuesday will keep their target rate at 1 percent, according to all 77 economists surveyed by Bloomberg News, half the European Central Bank’s rate. Since August, the Fed has said it will keep rates low for “a considerable period.”
“You have to scramble around to find reasons to buy the dollar at this point,” said Steven Englander, chief foreign exchange strategist for North America at Barclays Capital Inc. in New York. Returns on U.S. investments, including bonds, “clearly are not favoring the dollar.”
Against the euro, the dollar closed at $1.2222 in New York, compared with $1.2166 Friday, extending its decline on the year to almost 17 percent. The dollar slid to as low as $1.7363 against the pound, its weakest since October 1992, before finishing at $1.7332.
The dollar fell against the yen before briefly rebounding, as traders said the Bank of Japan sold yen to weaken the currency. It traded at 107.41 yen, the lowest since November 2000, down from 107.70 late Friday.
The dollar, which has fallen to a record against the euro for seven straight days, may reach $1.30 by mid-2004, said Adam Cole, a currency strategist in London for Credit Agricole Indosuez SA.
The dollar’s decline against the euro has outpaced even the most pessimistic forecasts gathered by Bloomberg News at the start of the quarter, when the dollar traded at about $1.15 per euro. The most dire of 52 forecasters expected it would weaken to $1.20 per euro by year-end. Barclays two weeks ago forecast the dollar would reach $1.22 per euro within three months.
Currencies that earn higher interest rates, such as the Australian dollar and the British pound, are benefiting as investors seek greater returns. In Australia, where the central bank last week raised its rate to 5.25 percent, the currency rose against the dollar to its highest in more than six years.
The dollar is vulnerable when foreign investors find better opportunities outside the U.S., because the U.S. imports more than it exports, sending dollars overseas. If foreign recipients opt to sell dollars instead of invest them, the currency’s value drops.
At about 4.2 percent, the U.S. 10-year Treasury note’s yield is lower than the comparable British, French and German government bond yields. In late July and early August, the U.S. yield was even with or higher than the competing yields, at about the same 4.2 percent to 4.4 percent level.
Investors will focus Tuesday on whether the Fed drops its commitment to keep rates low “for a considerable period.”
