Dollar under pressure

Published April 22, 2008

LONDON, April 21: The dollar was back under pressure Monday as disappointing results from Bank of America raised fresh questions about the outlook for the US economy in the wake of the sub-prime home loan crisis.

Dealers said players were also waiting anxiously for US data to give them a new lead on the dollar as the euro flirted with record highs again.

In late European trade, the euro rose to $1.5885 from 1.5814 late Friday in New York and was off a high of $1.5948 hit after the Bank of America announced first quarter earnings were down nearly 80 per cent.The dollar was at 103.32 yen, after 103.66 yen.

Dealers said that earlier in the day, after strong stock market gains in Asia, sentiment on the dollar had been more positive on the view that the worst of the credit squeeze was over but the Bank of America results hit that.

The resulting spike in the euro took it back to within sight of the record high of $1.5948 chalked up on Thursday.

At the same time, the hard line from eurozone officials about the danger of inflation provides sustained support for the euro because it suggests the European Central Bank will not cut interest rates until much later this year.

Players widely expect further rate cuts later this month by the US Federal Reserve, which will reduce the return on holding dollars. The ECB’s benchmark rate, 4 per cent, is much higher than that of the Fed’s at 2.25 per cent.

Dealers said the dollar will continue to suffer as a result until there are clear signs the US economy is beginning to pick up.

Barclays Capital analysts said in a note that they expected the market to test the $1.60 level over the next few weeks.

“There is a lot of caution ahead of another week of heavy earnings releases and some economic data,” said Thomas Lam, senior treasury economist at United Overseas Bank.

Commerzbank analyst Gavin Friend said the dollar would fall further.

“We keep our view that the dollar will come under renewed pressure once a rising number of market participants lose their faith in the current optimistic view and against the backdrop of an economy that will remain sluggish for longer than many market participants currently envisage,” he said.

Elsewhere, the British pound weakened after the Bank of England said it would allow high street banks to swap mortgage-backed assets in exchange for government bonds in an effort to improve financial market conditions.

In European trading on Monday, the euro changed hands at $1.5885 against $1.5814 late Friday, at 164.20 yen (163.96), 0.8019 pounds (0.7914) and 1.6075 Swiss francs (1.6102).

The dollar stood at 103.32 yen (103.66) and 1.0117 Swiss francs (1.0180).

The pound was at $1.9814 (1.9978).

On the London Bullion Market, the price of gold rose to $918.50 per ounce from $908.75 late on Friday.AFP

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