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Global markets dump dollars

The Baltimore Sun

FRANKFURT, Germany -- The world dumped the dollar yesterday, pushing it to an all-time low of $1.40 against the euro and to parity with the Canadian dollar for the first time in three decades as currency traders around the world digested the full implications of the Federal Reserve's new course for interest rates.

The frenzied selling began early in the day in Europe, never let up, and reached across the Atlantic as traders concluded that the lower borrowing costs the Fed introduced Tuesday would dampen the appeal of dollar-denominated assets such as stocks, bonds and real estate just as other central banks are raising rates to create the opposite effect.

With the Fed's action layered atop a weakening American economy menaced by the prospect of a retreat in consumer spending, the dollar radiated instability. Its traditional role as a refuge in times of crisis, evident as recently as early August, appeared all but forgotten.

"It's pretty ugly right now for the dollar," said Jim McCormick, the London-based chief of currency strategy for Lehman Brothers International. "But the markets are having a very rational response to what the Fed did on Tuesday."

The dollar dipped as low as $1.4098, having cracked the $1.40 level in London, the world's currency trading hub. The dollar also lost ground against the pound, with sterling now worth about $2.

The Japanese yen and the Swiss franc also rallied strongly against the dollar, a highly unusual development since interest rates are still comparatively low in both those countries. The dollar registered its biggest daily drop against the Japanese yen in two weeks.

Against the Canadian dollar, currency of the largest U.S. trading partner, the dollar tumbled to 1-to-1 parity, a level not seen since the 1976, the early phase of a currency crisis that would eventually send shock waves through the world economy. The Canadian dollar rose as high as $1.0008 before retreating to 99.82 U.S. cents at 6:06 p.m. in New York.

"It seems light years from five years ago when the dollar was threatening to drop below 60 cents," said Douglas Porter, an economist with BMO Nesbitt Burns, the brokerage unit of the Bank of Montreal. "It will affect the psychology here in a big way."

Still, currency analysts are dodging the label "dollar crisis" for the moment, preferring to see yesterday's events as the logical outcome of the Fed's surprise decision to lower its benchmark rate by a half-percentage point, to 4.75 percent - a step intended to quarantine the wider economy from the effects of a housing market collapse and soothe jittery credit markets.

But yesterday's events left little doubt that attitudes toward the dollar are changing faster than most analysts had expected.

"What is changing here is that people have been living with this notion that the dollar might get weaker briefly and then recover," said Thomas Stolper, a currency strategist with Goldman Sachs in New York. "But that view is evolving."

Almost daily, the American economy seems to be providing fresh evidence that the real estate slump might jar consumers into spending less - a fear evidently shared by policymakers at the Fed. That has given impetus to traders bearish on the dollar.

"I'm not sure you can argue that it is just interest rate differentials driving the dollar's weakness," said Mitul Kotecha, global head of foreign exchange research at Calyon in London. "The Fed is validating this course, but underlying that is concerns about economic growth."

In Europe, the dollar's record-breaking tumble set off a political reaction that has become common in recent years, with the French finance minister, Christine Lagarde, calling for a continent-wide effort to reverse its course.

"Let's say that it's a change in level that concerns all of us Europeans, and it's clearly a point we must address together among Europeans," Lagarde said during a trip to China, Reuters reported.

In Canada, meanwhile, economists generally agree that the Canadian dollar's ascent, which picked up speed about two years ago, is mostly related to the Canadian economy's health rather than shortcomings in the United States' economy.

Demand, much of it from Asia, has bolstered prices for several major Canadian exports including minerals, oil and wheat. At the same time the Canadian government, which restructured its operations and finances during the 1990s, is on track to report its 11th consecutive budget surplus.

As the chief economist of the Canadian Manufacturers and Exporters, a lobby group, Jayson Myers, finds little professional joy in the Canadian dollar's ascent. But he readily acknowledged that achieving parity would bolster Canadians' spirits.

"It makes a lot of people feel pretty good," said Myers, who is based in Ottawa. "They can go on trips to the States again. ... "

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