Investors Take Dollar Profits
The dollar fell against major currencies as investors and forex traders took profits on the dollar’s recent rally and concerns that US interest rates would remain near zero well into 2010. Reports showing a higher than expected rise in US inflation and decline in home construction put downward pressure on the dollar. The euro hit session highs Wednesday as a statement from a US Federal reserve official said that the central bank would tighten emergency asset purchase programs instead of raising interest rates. The euro hit $1.4977 after US inflation and housing reports were released. Federal Reserve Bank of St. Louis President James Bullard said that US policymakers may not start to raise rates until some time in 2012.
The Continuing Dollar Decline
Many traders predict a continuing dollar decline and investors are concerned about rising US debt and deficits. Sandeep Malhotra, of Clariden Leu in Zurich stated in an interview wit Bloomberg news, “Over the long term, the dollar is on a continuous decline. Given the constraints U.S. consumers are going to face going forward, given the huge debt burdens, we believe the structural divergence in growth will continue to play out.” The dollar vs. euro rate fell 0.4% to $1.4936 and against the Japanese yen the euro rose 0.7% to 133.66 The US dollar traded at 89.45 up 0.2%.
Fed Rates to Remain Near Zero
On Monday Federal Reserve Chairman Ben Bernanke said that a weak labor market and a decline in bank lending will slow US recovery and will make keeping interest rates low necessary for recovery to take place. Without a rise in interest rates the dollar will continue to be used for carry trades where investors purchase higher yielding assets and currencies with funds borrowed in countries with low rates. Antje Praefcke of Commerzbank said “Without initial rate-rise expectations, we consider a sustainable reversal in euro-dollar to be unlikely, as the dollar is likely to remain attractive for carry trades due to its low interest rates.”
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