Dollar at crossroads amid brighter US outlook

Peter Garnham
Financial Times
Monday, Aug 11, 2008

This week will be crucial in determining whether the dollar has broken free from its six-year downward trend, as speculation mounts that the US is in the best position to emerge quickly from the economic downturn.

The dollar index, which measures its value against a basket of six major currencies, put in its best performance for over three-and-a-half years last week and boosted the dollar to its highest level for four months.

Against the euro, the dollar surged more than 5 cents, taking it more than 6 per cent higher than the low it hit last month.

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Amid thin August volumes, traders believe there will be impetus to push the euro-dollar rate below the $1.50 barrier from its Friday figure of $1.5014 and to send sterling-dollar towards $1.90, consolidating last week’s 2.9 per cent fall to $1.9189.

Analysts say the turn towards the dollar reflects surprise that the fallout from the credit crisis has had such a marked effect on economies outside the US.

They say other central banks, unlike the Federal Reserve, have been slow to respond to a potential slowdown, refusing to cut interest rates as they focus on fighting inflation.

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