LONDON (Reuters) – The dollar hit a record low against the euro and a basket of major currencies on Wednesday after the Federal Reserve said U.S. growth was likely to slow in 2008, underscoring market expectations for more monetary easing.
The yen rose to a two-year high against the dollar as a tumble in Asian shares amid growing worries about the health of the U.S. economy prompted investors to further cut risky positions in carry trades.
Besides market expectations that the Federal Reserve will cut interest rates further, the dollar has been under pressure from growing speculation that Middle East oil exporters, including Saudi Arabia, may ditch or revalue their dollar pegs.
“The softer growth story is leading to risk aversion. If the story in the U.S. becomes very bad, then the story elsewhere becomes bad and that’s actually dollar positive,” said Geoff Kendrick, currency strategist at Westpac.
“But so long as it’s medium bad, it’s obviously dollar negative — and with the backdrop of the Saudi story it’s pretty difficult to paint a medium-term bullish dollar story.”
The Tokyo bourse’s benchmark Nikkei average slumped 2.5 percent to close at a 16-month low, with stock indexes in both Hong Kong and South Korea falling more than 3 percent.
European equities fell nearly 1.5 percent in early trade as markets digested the impact of oil prices spiking to a record high just shy of $100 a barrel.
By 0824 GMT, the euro had given up some of its gains to trade down 0.1 percent on the day at $1.4801, after striking a record high of $1.4856, according to Reuters data.
The dollar slipped about 0.8 percent to 109.06 yen, falling as low as 108.81 yen, the lowest since September 2005.
The dollar also hit an all-time low against the Swiss franc at 1.1025 francs while it sank to a record low against a basket of six major currencies at 74.953.
“If the market is pushing for regime shifts within FX or testing the boundaries of the dollar, while ignoring weakening fundamentals across the globe, another sharp rise in risk aversion is inevitable,” UBS said in a note to clients.
“Overshot rates such as EUR/USD will need to be corrected as the rapid unwind in risk investments will result in investors seeking the dollar and yen for safety.”
The Fed projected on Tuesday that U.S. economic growth will slow in 2008 to between 1.8 and 2.5 percent, down sharply from the 2.5 to 2.75 percent forecast in June, before picking up in 2009.
Minutes of the Fed’s October meeting released on Tuesday showed that the central bank’s decision to lower interest rates last month was a close call.
But market players still expect it to lower rates further from the current 4.5 percent amid worries about a credit squeeze stemming from the U.S. subprime mortgage crisis and concerns about the impact on the broader economy.
Elsewhere, the market will be watching the publication of the minutes from the Bank of England’s last rate-setting meeting, especially to see how closely the vote was split.
“I think the trade for today will be to sell cable. The Bank of England minutes at 0930 GMT could be suggestive of a need to rate cut in the UK,” Westpac’s Kendrick said.