Dollar suffers biggest annual decline against euro

THE dollar had its biggest annual decline versus the euro on low US interest rates relative to Europe, and on signs officials on either side of the Atlantic aren’t concerned about the decline in the US currency.

The Federal Reserve has said it won’t rush to raise its target rate from 1%, which is half the European Central Bank’s level. On a trade-weighted basis, the US currency shed about 15% last year, the most since 1987.

Investors have “little reason to step in and buy dollars,” said Robert Sinche, head of global currency strategy in New York at Citigroup Inc. “The Fed has told us that economic data isn’t going to change anything in terms of interest rates.” Against the euro last year, the dollar lost about 17% and weakened to a record low of $1.2649 earlier yesterday. As of 5pm in New York yesterday, the dollar was trading at $1.2597 per euro, compared with $1.2551 on Wednesday. The dollar reversed early morning declines as some traders closed out positions before the New Year’s Day holiday.

The dollar also had its largest yearly decline in five against the yen. It traded at 107.29 yen from 106.97.

Against a basket of major currencies measured by the Fed’s Trade Weighted Dollar Index, the dollar dropped about 15%, the most since two years after Group of Seven finance ministers met at the Plaza Hotel in New York and agreed to let the dollar weaken.

ECB president Jean-Claude Trichet has said that he favours a strong euro. US Treasury Secretary John Snow this month described the dollar’s slide as “orderly.”

“Until there’s a perception in the marketplace that the Fed is about ready to start bringing rates back up, I don’t see the market thinking the dollar is going to be stronger,’ said Mark Gargano, managing director of foreign exchange at Wachovia Corp in Charlotte.

The dollar fell earlier after the number of Americans filing first-time applications for state unemployment benefits fell more than forecast to 339,000 in the week ended Saturday.

Some traders also sold on concern there may be a terrorist attack during the New Year’s holiday. German police sealed off a military hospital in Hamburg, saying Islamic terrorists planned to bomb the building.

Small airplanes were banned from flying over New York and Las Vegas on Wednesday.

“Terrorism fears are dominating today,’ said Lee Ferridge, head of currency strategy at in London at Rabobank Groep NV, the third-largest Dutch bank.