Dollar at one-year high against euro

Greenback continues to gain on major world currencies.

The dollar yesterday hit a one-year high against the euro, continuing a trend in which major world currencies have weakened against the greenback. The dollar's strengthening signals a sunnier outlook for the US than Europe as recession fears spread to both economies. It also follows years of dollar weakness that contributed to the rise in oil prices - oil is valued in dollars - and brought inflation into countries in the Gulf, where currencies are pegged to the dollar.

One euro bought about US$1.3894 in trading yesterday, a low not seen since last September, when a euro bought $1.3866. The one-year value follows a precipitous fall for the euro against the dollar in the past two months. The euro had reached $1.6015 on July 15. The British pound, among a number of other world currencies, has followed a similar trajectory against the dollar. The pound has declined from $2.1124 last November to roughly $1.75 yesterday.

The dollar's sharp move upwards was pinned to recent interest rate moves in developed nations and weak forecasts for economic growth in Europe. Yesterday, New Zealand's central bank cut interest rates by half a per cent, to 7.5 per cent, starting a cascade that sent a slough of currencies lower against the dollar. A European Commission report downgrading economic growth forecasts for the region from 1.7 per cent to 1.3 per cent also continued to shake Euro zone currency markets.

In the Gulf, the primary effects of the dollar's strengthening have been a decline in oil prices, which has reduced windfall revenues, and a dampening of the urgency of calls for the revaluation of currencies. Kuwait last year abandoned its dollar peg in favour of a basket of currencies. All of the five remaining GCC countries, however, have maintained their pegs even in the face of inflation as the dollar weakened. The pegs meant that Gulf countries saw their currencies lose value on the global stage and were forced to march in step with reductions in key interest rates by the US Federal Reserve. That injected more money into GCC economies and led to higher prices, which in turn prompted calls for a rethink of the pegs. With the dollar gaining value, however, these calls have subsided.