Euro strikes six-month dollar low
The euro on Monday fell below 1.45 dollars for the first time since February as the market anticipated lower interest rates in the eurozone, with inflation concerns easing amid tumbling oil prices.
In morning London trade, the European single currency dropped to 1.4499 dollars, the lowest point since February 12. It later improved to stand at 1.4509 dollars, compared with 1.4606 dollars late on Monday in London.
Dealers said the market was betting that the European Central Bank would need to consider a cut in interest rates sooner rather than later.
"If oil prices resume their decline the assumption that the ECB will at the very least reverse July`s rate hike will mount and weigh further" on the euro, Calyon economist Stuart Bennett said on Tuesday.
For the moment, the European Central Bank was widely expected to leave its main lending rate at 4.25 percent on Thursday despite growing signs of a sharp economic slowdown across the eurozone, analysts say.
The ECB raised its main interest rate in July even though the economy contracted 0.2 percent in the second quarter -- the first time it had done so since the euro`s creation in 1999 -- to ensure markets understood it was serious about fighting inflation driven by soaring energy costs.
Inflation in the eurozone eased to 3.8 percent in August, down from a record 4.0 percent in July but still well above the ECB target of just below 2.0 percent.
While oil prices have come off the boil for now, there is concern that wage demands could create a second round of inflation pressures.
Oil traded sharply lower on Tuesday, sliding close to 104 dollars a barrel, after Hurricane Gustav apparently spared key oil facilities in the Gulf of Mexico, dealers said.
The dollar could post further gains as other central banks acknowledge the worsening state of their economies compared with the United States, Chuo Mitsui Trust Bank strategist Yosuke Hosokawa said on Tuesday.
"Markets are focused on the weakness of economies other than the US. There is a widespread view that currencies will further weaken against the dollar," Hosokawa said.
The Bank of England was also expected to leave its key lending rate on hold Thursday but there was growing speculation that it too would be forced to cut rates before long.
The Australian central bank cut its benchmark rate by a quarter point to 7.0 percent on Tuesday, the first reduction since 2002.
Reserve Bank of Australia governor Glenn Stevens said the decision had been taken because financial conditions had become "quite tight."
"Conditions in international financial markets remain difficult, with heightened concerns over credit persisting," Stevens said.
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