No relief in sight for battered dollar
Facing a widely anticipated Fed rate cut, dollar is likely to struggle to move higher against euro.
NEW YORK (CNNMoney.com) -- With the dollar slipping to an all-time low against the euro, currency strategists say the greenback is not likely to rebound anytime soon.
After hovering near record lows against the euro in recent weeks, the dollar quietly slipped to a new low of $1.3914 early Wednesday, passing the previous record set in July.
And that's about where the dollar will be for awhile, foreign exchange experts say. The euro is not likely to trade much higher than $1.40 in the coming weeks, especially if the U.S. economy is hit with more negative news such as a disappointing read on August retail sales due out on Friday.
"I don't think we would sustain a move above that," said Ezechiel Copic, a senior currency analyst with IDEAGlobal in New York.
Since mid-August the dollar has steadily declined against the euro amid the widening subprime and credit market crisis, and fell sharply following last week's employment report, which revealed that the U.S. job market contracted for the first time in four years.
While a lower dollar drives domestic and overseas demand for U.S. goods, it also poses an inflationary risk to the U.S. economy, limits consumers' buying power overseas and typically pushes up the price of oil.
Widespread expectations that the Federal Reserve will cut interest rates by 25 basis points or more Tuesday has also added pressure to the dollar. At the same time, the belief that the European Central Bank will raise rates again before the year's end has helped prop up the euro.
"The divergence between the two in terms of monetary policy is what's driving the flow towards the euro," said Boris Schlossberg, senior currency strategist at DailyFX.com. "However, the open-ended question is just how loose will Fed policy be."
Cutting interest rates could help bail out financial markets and soothe credit crunch pains, but such a move would also hurt the dollar by reducing the returns on dollar-denominated investments.
But the Fed's actions won't solely determine the direction of the dollar. Experts say it will take more positive economic news or clarity about the scope of the recent credit crisis to turn the dollar around.