Dollar drops to new record low

burning.jpgAs oil jumped over $100 per barrel and gold reached new record heights of over $960 the U.S. dollar reached a new record low yesterday. For the first time since the euro was found in 1999 the U.S. dollar crushed the psychological barrier of $1.5 per EUR.

Analysts believe the Fed will further cut the intrest rates to fend off a recession in the U.S. and that’s causing the dollar to drop.

“The euro is trading above 1.50 against the dollar for the first time since the eurozone came into existence in January 1999,” said Global Insight economist Howard Archer.

“This is primarily a consequence of the dollar being undermined by further weak US data heightening concerns over the US economy and reinforcing expectations of additional interest rate cuts by the Federal Reserve.”

Analysts said the euro was boosted by the prospect of favourable interest rate differentials between the eurozone and the United States.

Speculators generally prefer to invest or hold currencies in countries where interest rates are rising or expected to rise in the hope they can increase their potential returns.

Soaring oil prices have diverted petro-dollar revenues into the strengthening European single currency, according to ABN Amro analyst Melinda Smith.

“In addition to the fresh widening in interest rate differentials, one of the key drivers of this move appears to be the surge of oil prices as petro-dollars are channelled into the euro,” Smith said.

When you take a look at the purchasing power the dollar is highly undervalued. According to an article I read in the newspaper today a euro is fundamentally worth only $1.1 to $1.2 instead of the $1.5 it’s currently trading at. I hope the dollar will rise again but it doesn’t really seem likely in this market.

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