LONDON, (Reuters) – The dollar sank to fresh record lows below $1.40 per euro on Thursday, weighed down by a hefty U.S. interest rate cut earlier this week and expectations of more moves to come.
The breach of the psychologically key $1.40 level — heralded as a pain barrier for euro zone exporters — came in early European trade, with the move taking out key stop-loss and option barriers and fuelling a broad-based euro rally.
The single European currency also rose above 70 pence for the first time in 1-1/2 years.
Dollar weakness intensified after Saudi Arabia’s Central Bank Governor Hamad Saud al-Sayyari told Reuters on Wednesday that it would not cut interest rates to match those of the U.S. has added to dollar weakness.
“The main story today has been the possible break of the peg with the Saudi riyal,” said Adam Cole, global head of FX currency strategy at Royal Bank of Canada.
“This could lead to lack of confidence on the dollar as its role as a reserve currency is being put into question, which is also supporting the euro.”
The U.S. Federal Reserve slashed interest rates by 50 basis points last Tuesday to 4.75 percent in a bid to shield the U.S. economy from a deepening housing slump and credit market turbulence.
Sterling edged higher versus the dollar after Bank of England Governor Mervyn King said that cutting interest rates at first sight of every problem was not the way to go. Click on for highlights King’s testimony to the UK Parliament’s Treasury Select Committee.
Investors are now looking to comments from Fed Chairman Ben Bernanke who speaks at 1400 GMT for further clues on the outlook for U.S. monetary policy.
Investors expect more Fed cuts in the months to come while rhetoric from the European Central Bank suggests it could resume raising rates once calm returns to financial markets.
“As long as the market is focused on rate cut expectations from the Fed, the dollar will stay on the defensive,” said Carole Laulhere, currency strategist at Societe Generale in Paris.
By 1017 GMT, the euro had risen to all-time highs of $1.4064, up 0.5 percent on the day. The yen was also up half a percent at 115.52 per dollar.
The dollar also set 15-year lows against a basket of six major currencies, at 78.791 A move below 78.190 would take the dollar index to record lows.
On the flip side, the Australian and New Zealand dollars rallied broadly, as the Fed rate cut calmed risk aversion.
This made investors more willing to return to risky carry trades where purchases of high-yielding Antipodean currencies are funded by cheap borrowing in low-yielders such as the yen.
One high yielder which did not really benefit from stronger risk appetite though was sterling, which has been hit in recent days by worries over the health of the UK financial services and housing sectors and growing expectations of rate cuts from the Bank of England.
The euro rose as high as 70.06 pence, breaching the key 70 level for the first time since April 2006. On a trade-weighted basis, sterling opened at a fresh one-year low of 101.6.
A busy day for global central banker speeches also features public appearances by ECB President Jean-Claude Trichet.
The main focus though will be on Fed’s Bernanke, who is scheduled to testify on problems in the subprime mortgage sector before a congressional committee.