U.S. Dollar in free-fall; high gas prices stoke recession worries

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Data add to gloom on US economy
By Francesco Guerrera, Jonathan Birchall and Daniel Pimlott in New York
Published: October 30, 2007

A build-up of bearish data fueled fears of a US economic slowdown on Tuesday as consumer confidence slumped to a two-year low and house prices in big cities suffered their biggest drop in 16 years.The growing evidence that the credit squeeze and housing meltdown are spreading to the rest of the domestic economy will increase pressure on the Federal Reserve to set aside concerns over rising inflation and cut interest rates on Wednesday.

Blue chips such as Procter & Gamble and US Steel added to the gloom with results that disappointed investors and contributed to a 0.7 per cent fall in the S&P 500 by the close in New York trading.

The negative reaction to earnings by two companies with global operations reflects deepening investor concerns that the weak dollar and solid global economic growth might not be enough to help corporate America offset a slowdown.

With experts warning that the next few months will bring more bad news from consumers and the housing market, investors will be looking to the monetary authorities’ decision, and their closely watched comments, to boost sentiment.

“The housing market, credit problems and high gasoline prices are casting a cloud over consumer confidence and the economy,” said Lynn Franco at the Conference Board, a research organisation. According to the board, consumer confidence fell sharply in October and was now at its lowest level since the aftermath of Hurricane Katrina in October 2005.

The October drop in the monthly consumer confidence index was bigger than expected and raised the prospect of a marked deterioration in business conditions in sectors such as retail and consumer goods during the holiday shopping season.

The resilience of US consumers – a key driver of economic growth in the US and in emerging markets such as China – was further tested by a downbeat report on house prices. The Case-Shiller index showed that house prices in 10 metropolitan areas were 5 per cent lower in August compared with the year before, the biggest drop since the property crash of 1991.

“The fall in home prices is showing no real signs of a slowdown or turnround,” said Robert Shiller, chief economist at MacroMarkets. “There is really no positive news in today’s report.”

P&G, the consumer product group, said its US business, which accounts for about half of its sales, had been affected by domestic economic woes.

“We did see a slight slowdown in the US market growth…and that’s had some impact on the business,” Clayt Daley, chief financial officer, said. AG Lafley, chief executive, played down the threat of a US recession and said demand for P&G’s branded products remained solid.


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Dollar Hits New Lows on Economic Data
Tuesday October 30, 2007
By Tali Arbel, AP Business Writer

Dollar Sinks to 26-Year Low Vs. Pound, Record Low Against Euro As Economic Data Disappoints

NEW YORK (AP) — The dollar fell to a new record low against the euro and a 26-year low against the British pound Tuesday after lower-than-expected consumer confidence data was released and ahead of Wednesday’s Federal Reserve interest rate decision.The dollar slid against the euro throughout the afternoon, as the euro peaked at $1.4440, the latest in a string of all-time highs against the dollar, before settling at $1.4434. The euro had finished at $1.4424 in New York late Monday, the same day it hit its last record of $1.4438.

The pound rose to $2.0679 in late New York trading Tuesday — a level last seen in 1981, when Diana married Prince Charles and Margaret Thatcher was prime minister.

The British currency was powered by expectations that the Bank of England will keep its benchmark interest rate at 5.75 percent next week. The pound had finished at $2.0619 in New York late Monday.

The Canadian dollar hit a new 47-year high of $1.0510 Tuesday, according to Dow Jones’ Interbank foreign exchange rates, before settling at $1.0488, down from $1.0495 in late New York trading Monday. The U.S. dollar bought 95.35 Canadian cents.

The Canadian dollar is a commodity-backed currency, benefiting when prices of its exports rise. Canada is a major producer of oil, and crude prices have risen 35 percent since August, hitting a string of record highs.

The euro and the Canadian dollar have been climbing steadily against the dollar, regularly touching new highs since August amid fears over the health of the U.S. economy — worries stoked by the subprime credit crisis and disappointing economic reports — and rising oil prices.

Tuesday saw the release of more disheartening economic data, as the Conference Board reported that its Consumer Confidence Index fell to 95.6 — its lowest level since October 2005 — from a revised 99.5 in September. It is the index’s third consecutive monthly drop and signals consumers’ insecurities over the economy and their jobs.

Other critical economic reports scheduled for the rest of week include an advance report on gross domestic product and the releases of figures on third-quarter manufacturing activity and October employment.

Markets expect the U.S. Federal Reserve to cut its key interest rate from its current level of 4.75 percent Wednesday — adding to an unexpectedly bold half-point cut last month.

Although lower interest rates can jump-start an economy, they can weaken a currency as investors transfer funds to countries where their deposits and fixed-income investments bring higher returns. Higher rates can boost a currency.

“The weakening of the dollar today came after the consumer confidence numbers came in. The market’s focusing more on economic data and what its implications are for December rather than tomorrow’s rate cut,” said Bob Sinche, head of global foreign exchange strategy at Bank of America Corp., adding that investors have already priced in a 25-basis point cut for October, and the dollar probably would not react strongly to tomorrow’s rate cut announcement.

The decline of the dollar makes U.S. exports cheaper abroad, which could boost corporate earnings and may increase tourism at home. However, prices of foreign-made goods, such as French wine and Canadian maple syrup.

In other trading, the dollar rose slightly against the Japanese currency to 114.77 yen from 114.59 yen, but fell against the Swiss franc to 1.1600, from 1.1651 Swiss francs late Monday.