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Euro hits new high against dollar

Latest update : 2008-03-12

The euro jumped to 1.5514 dollars, the highest reading since the creation of the single currency in 1999. The euro was driven by a report that industrial output in the eurozone had risen by 0.9 percent in January.

The dollar plunged to new lows against the euro Wednesday as the impact of central bank action to bolster ailing credit markets faded, leaving players focused on an expected cut in US interest rates next week.

The euro, driven by a report that industrial output in the 15-nation eurozone had risen a stronger-than-expected 0.9 percent in January, jumped at one point to 1.5514 dollars, the highest reading since the creation of the single currency in 1999.

The euro was later at 1.5484 dollars against 1.5333 late Tuesday.

The US currency was meanwhile at 102.38 yen, down from 103.42 on Tuesday.

Dealers said investors were re-assessing Tuesday's move by the US Federal Reserve to inject 200 billion dollars into money markets in order to get an acceptable level of bank credit flowing again.

The Fed action, carried out in concert with four other central banks, was made necessary in the face of a global credit squeeze brought on by the US subprime mortgage market crisis.

Initially the intervention was taken by investors as a signal that the Federal Reserve's monetary policy meeting next week may not deliver the three-quarter-point cut in US interest rates that had been expected in some quarters.

Hans Redeker, currency strategist at BNP Paribas, said the central bank action was aimed at easing conditions in the credit markets, smoothing the way for improved transmission of monetary policy.

"The movement of the Fed ... wasn't a substitute for cutting rates but an attempt to get credit spread rates down," he said.

"Monetary policy is still going to ease rates and markets have come round to this view today, hence the fall in the dollar," he added.

A decision by the Fed to lower rates by as much as three-quarters of a point would make the dollar far less attractive to investors and could be expected to send the euro sharply higher still.

While on Tuesday there had been suggestions that the Fed would limit itself to a half-point cut, such speculation was not sufficient to support the dollar on Wednesday.

Redeker said the US currency was expected to weaken further in coming weeks, especially against the euro if economic data for the 15-nation single currency zone continued to be positive.

"The markets are selling dollars left, right and centre and there's nothing out there which suggests this is going to stop anytime soon," he said.

Eurozone industrial output data also showed a strong 3.8 percent gain compared with January last year, far above the forecasts for an increase limited to 2.5 percent.

Martin van Vliet at ING said the news would strengthen further the European Central Bank's case for delaying a eurzone rate cut.

"The hefty increase in eurozone January industrial production is likely to strengthen the growing belief that the eurozone economic slowdown may not be severe enough to dilute the ECB's concerns over medium-term inflation prospects and to force the bank into an easing posture," he said.

In European trade Wednesday, the euro changed hands at 1.5484 dollars against 1.5333 late on Tuesday, at 158.49 yen (158.57), 0.7667 pounds (0.7639) and 1.5811 Swiss francs (1.5848).

The dollar stood at 102.38 yen (103.42) and 1.0214 Swiss francs (1.0334).

The pound was at 2.0197 dollars (2.0067).

On the London Bullion Market, the price of gold rose to 975.50 dollars an ounce from 970 dollars late Tuesday. Last Thursday, the precious metal hit a record high of 992.05 dollars.

Date created : 2008-03-12