Crisis mounts as dollar drops

LACK of solid US data pushed the dollar to record lows yesterday as the euro hit a high of $1.2898.

Subsequent comments by president of the European Central Bank Jean-Claude Trichet sent the euro back to just under $1.28 but, by late afternoon, the euro had gone back up to 1.2801

However, the general market view is that, without strong indications that the US is on its way to solid recovery, the euro should breach $1.30 in the coming days.

Overall claims by the world's top central bankers that the global economy has returned to growth may help to put a floor under the dollar, but that remains to be seen. Their comments yesterday describing the dollar's sharp fall as “unwelcome and inappropriate” triggered the dollar's modest rally.

On the economy, "the current growth trend can be observed in all regions of the world and it seems strong, Mr Trichet said after chairing a meeting of the G10 group of central bank chiefs in Basel, Switzerland. However, the ECB chief warned against sharp shifts in currency markets. "Regarding the dollar's excessive volatility, brutal moves are not welcome or appropriate."

He added that there was a "very large degree of convergence" on the currency situation among the G10 central bankers.

His comments followed a regular meeting of the central banks at the Bank for International Settlements in Basel.

Despite the intervention by the G10, analysts still expect the slide of the greenback to continue, despite yesterday’s rally.

It is generally believed that Washington still wants the dollar to go weaker to ensure economic growth in an election year.

That view hasn't shifted.

Some observers still fear a dollar crisis rather than an orderly dollar decline could be triggered if the US fails to produce jobs.

Niall Dunne, economist, Ulster Bank Financial Markets, said yesterday that last month was pretty grim on the jobs front for the US with just 1,000 jobs added. If the "recovery" in the US stays joblessness then other Indices will not count for much in terms of dollar support going forward, he said.

The “jobless recovery” is firmly back on the agenda, and that means that the Fed are on hold on interest rates for as far as we can see into the future, he said.

And that brings the added risk that inflationary pressures are going to build in the US eventually, given money is so cheap, he said.

But without signs of sustainable employment increases, the Fed will keep US rates on hold at 1%.

That was why the euro/dollar ratio starts the week in the $1.29 range, and there was “every chance that the dollar will fall further in the next five days.”