Dollar Hits New Lows After Fed Forecast

The release of minutes from the Fed's October meeting and its economic forecasts for the next three years led many investors to think a December rate cut was imminent given the state of turmoil in credit markets and the Fed's forecast of decreasing inflationary risk. That drove the dollar down almost across the board and to new record lows against the euro and the Swiss franc.

The euro reached as high as $1.4819, according to Dow Jones' Interbank foreign-exchange rates, before settling back to $1.4815 late in New York, still significantly up from the $1.4667 it bought Monday.

The Fed's forecast saw slowing growth for businesses in 2008 and a downgrade to gross domestic product projections due to tightness in the credit market, the housing slump, and rising oil prices.

The Fed also forecast rising unemployment for next year and moderate inflation, which could leave it open to cut interest rates in December and 2008.

"With credit markets in such turmoil, I can't see how the Fed can get away with not cutting rates in December," said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Conn.

Although lower interest rates can jump-start an economy, they can also weaken a currency as investors transfer funds to countries where they can earn higher returns.

The British pound rose to $2.0667 from $2.0497, while the dollar fell to 109.69 Japanese yen from 109.85 yen.

The dollar fell to 1.1060 Swiss francs from 1.1159 Swiss francs Monday after bottoming out at 1.1058 Swiss francs, a record low.

However, the dollar creeped up against the Canadian dollar to 98.32 Canadian cents Tuesday from 98.31 cents.

The U.S. Commerce Department reported that the construction of new homes and apartments rose by 3 percent in October. That was the first increase after three months of declines and the biggest advance since a 6 percent rise last February -- and higher than the forecast drop of 1.3 percent.

However, most experts believe that housing is likely to remain weak through much of 2008 as builders struggle with historically high levels of unsold homes and rising mortgage defaults, which are dumping even more homes back on glutted markets. The positive news was not viewed as a signal of a turnaround.

Applications for building permits -- seen as a good sign of future activity -- fell by 6.6 percent, their fifth straight monthly decline, the Commerce Department reported.

The euro, the pound and other currencies have been climbing steadily against the dollar since August amid fears for the health of the U.S. economy, stoked by the subprime credit crisis.

Surging oil prices -- which rose to a new record high above $98 a barrel Tuesday -- have driven up commodity-backed currencies such as those of Canada, Australia and New Zealand.

The euro also found support when Germany's producer price index came in above expectations, which "underlined the scope for a rate hike from the ECB as soon as next week," said James Hughes, an analyst at CMC Markets.

Part of the dollar's recent weakness has stemmed from speculation that even as the Fed will continue cutting interest rates, the European Central Bank will hold, or even increase, its own.

"There's little around to support the dollar right now," Hughes said.

A weak dollar can boost the earnings of American companies that sell goods abroad, as exports become more competitive, even as the prices of foreign travel and imports increase for Americans.

However, the weak dollar also makes major investors such as foreign central banks and oil-producing nations leery. Their reserve dollar holdings lose value, prompting the recent calls by a Chinese government official to diversify holdings from the dollar and by representatives of OPEC nations to consider pricing oil in other currencies.But denominating the price of oil in another currency, even in part, would further drive down the dollar, causing the value of U.S. investments held by OPEC countries to decline as well.

"It isn't likely in the next couple months," said Gilmore, terming the move a "mutually assured financial destruction."