During early deals on Wednesday, the US dollar rose beyond the 1.28 level against the euro for the first time since November 2006 as investors increased bets that the potential impact of a recession is greater on the European economy than on the U.S. economy. The dollar also surged to a fresh 5-year high against the pound and a new multi-month high against the franc.
Worldwide efforts have eased some strains in dollar funding among banks in money markets, but investors continue to pick up the world's most liquid currency for safety, as the state of financial markets remains fragile.
Weak equity markets also made investors nervous of risk and buy US dollars. Following the weakness in New York stocks overnight, Asian stocks traded lower today as investor pessimism prevailed amid a series of dismal earnings reported yesterday by major U.S. companies such as Dupont, Caterpillar, and Texas Instruments.
The most dominant market trend since the financial crisis began, particularly in the last month, has been a broad process called de-leveraging, by which investors cut down on their debt-financed positions and sell liquid assets for cash or to pay off losing strategies. Of the many markets affected by this process, the equity and commodity markets have been hard hit.
The steep downward trend in raw materials prices, almost all of which are priced in U.S. dollars has supported the currency's strength. Oil fell over $1 to around $71 a barrel today, extending its 4 percent slide yesterday, on mounting worries that output cuts by OPEC will not be enough to offset slackening energy demand among leading consumers.
Expectations that a report from the U.S. Energy Information Administration, due for release today, would show a rise in crude oil stockpiles and product inventories also weighed on oil prices.
OPEC will meet this Friday and analysts widely expect an output cut to boost prices. The size of such a cut is highly controversial and has far-reaching consequences, especially when the global economy is facing a potential recession. The OPEC meeting could see an intense debate on how much oil members should take off global markets as they balance their price needs against risks to a fragile world economy.
Investors, who earlier this year piled into oil and other commodities as a hedge against inflation and the weak dollar, are putting cash into safer havens and have sent oil plummeting by more than $60 from its record high above $147 in July.
The sluggishness in the credit markets that triggered much of the heavy selling in markets around the world since mid-September appeared little changed even after a string of interest rate cuts by central banks in the U.S., Europe and Asia this week in an attempt to resuscitate lending.
On October 8, six of the world's most influential central banks came together to announce a significant reduction in interest rates. The largest coordinated central bank action in history involved the central banks in the U.S., Canada, the Euro-zone, the UK, Switzerland and Sweden, each of which lowered its benchmark interest rate by half a percentage point. The Bank of Japan did not participate in the rate action, but expressed its strong support for the policy actions.
In early trading on Wednesday, the dollar rose beyond the 1.28 level against the euro for the first time in nearly 2-years, climbing to 1.2740 at 12:25 am ET. If the dollar gains further, it may likely target the 1.26 level. The euro-dollar pair closed yesterday's deals at 1.3058.
The European currency also slumped to fresh multi-year lows against the yen and the franc on the prospects of a slowing global economy, especially in the 15-nation Euro zone. Equity weaknesses in the United States, Europe and Asia also prompted market participants to sell the euro and other high-yielding currencies for the yen to hedge risks.
After hitting a record low of 1.6040 against the euro on July 15, the dollar has appreciated 13% to reach a 1-year high of 1.3884 on September 11. Thereafter, the dollar pulled back on disappointing US economic reports.
The bankruptcy of Lehman Brothers, the sale of Merrill Lynch, and the struggle for survival of American International Group, combined to drive down dollar. However, after hitting a 1-month low of 1.4868 on September 22, the dollar bounced back and breached a 1-year high in early October. Since September 22, the dollar has gained 14% against the euro.
Against the pound, the dollar jumped to a fresh 5-year high of 1.6206 during early deals on Wednesday. On the upside, 1.60 is seen as the next target level for the dollar. The pound-dollar pair was worth 1.6692 at the close of North American session yesterday.
The pound also plunged to new multi-year lows against the yen and the franc and a new multi-day low against the euro as the Bank of England Governor Mervyn King said yesterday that the U.K. economy now appears to be entering a recession, and it will take a "long, slow haul" to bring economic growth back to more normal conditions.
Britain probably faces a recession and policy makers will act to prevent inflation from slowing too far after the country's worst banking crisis since World War I, Bank of England Governor Mervyn King said yesterday. House prices will extend declines and the pound may depreciate further, King said, in his first explicit acknowledgement that the U.K. may be heading into a recession.
King's comments suggest a significant shift in his view of U.K. economic prospects, and open the door to further near-term rate cuts. The major European currencies declined sharply yesterday following comments from the Bank of England Governor Mervyn King.
The dollar that fell to a 26 1/2 -year low of 2.1163 against the pound in November 2007 reversed direction thereafter. However, the dollar eased in late January 2008 but it rebounded in March and showed choppy trading until breaking the long-term resistance level of 1.937 on August 8, 2008. The dollar strengthened beyond the 1.90 level on August 12, 1.80 level in early September and crossed the 1.70 level on October 10. Since November 2007, the dollar has surged 23% against the pound.
A collapse in the credit markets and the worst housing market in a generation are driving the U.K. economy, Europe's second- biggest, toward a slump. Expectations for rate cuts in Europe and the U.K. are growing stronger day-by-day because of the weak economic outlook.
Reflecting the impact of the global economic slowdown, orders for UK made goods declined at the fastest pace since 1999, results of a quarterly survey showed Tuesday. A decline in domestic as well as overseas demand and a significant fall in production have resulted in the sharpest single quarter fall in manufacturing confidence for 28 years.
The Industrial Trends Survey conducted by the Confederation of British Industry or CBI revealed that the balance of manufacturers reporting a fall in new orders in the last three months stood at minus 30%, which was the biggest quarterly fall in total new orders since January 1999.
During early deals on Wednesday, the US dollar spiked higher against the Swiss franc and reached 1.1667 at 12:30 am ET. This set the highest point for the dollar since November 2, 2007. The next upside target level for the dollar is seen at 1.18. The pair closed Tuesday's trading at 1.1522.
The dollar-franc pair advanced after hitting a record low of 0.9644 on March 17. Although, the US currency weakened in May, it rebounded in the middle of July and extended its uptrend in the subsequent months. The dollar has advanced 17% against the franc from a record low.
The US currency climbed to a fresh multi-year high of 1.2334 against the loonie during early trading on Wednesday. This may be compared to yesterday's close of 1.2139. On the upside, the greenback-loonie pair is likely to target the 1.25 level.
The Bank of Canada's 0.25% interest rate cut yesterday pushed the loonie down across the board. Warning that the outlook for growth and inflation in Canada is now more uncertain than usual, the Bank of Canada lowered its key interest rate by 0.25% to 2.25%. Analysts were expecting the Bank of Canada to slash rates by 50bps.
In its statement accompanying the rate decision, the BoC noted that there are three major interrelated developments having a profound impact on the Canadian economy.
According to the central bank, the intensification of the global financial crisis has led to severe strains in financial markets. The BoC also suggested that the global economy appears to be heading into a mild recession, led by a U.S. economy, which is already in recession. Sharp declines in many commodity prices have weighed on the Canadian economy.
Against the currencies of Australia and New Zealand, the US currency climbed to a 6-day high of 0.6636 and 0.5959 in early trading on Wednesday. If the greenback advances further, it may likely target 0.65 against the aussie and 0.592 against the kiwi. The aussie-greenback and the kiwi-greenback pairs were worth 0.6711 and 0.6058, respectively at yesterday's close.
The Aussie that gained slightly against the greenback following Australia's third quarter inflation report at 8:30 pm ET pared its gains shortly.
Australia's annual inflation accelerated in the third quarter to the fastest pace since 2001, driven by costs for housing and food. The consumer price index jumped 5 percent from a year earlier, the Australian Bureau of Statistics said in Sydney today. The CPI rose 1.2 percent from the second quarter, when they gained 1.5 percent.
Shortly after the release of the CPI report, Australia's Treasurer Wayne Swan told reporters in Canberra that the government expects the third quarter inflation to be the peak, followed by a period of moderation. Swan said the fundamental global economic picture changed significantly in mid-September, around the time of the collapse of Lehman Brothers.
Swan's statements echoed those coming yesterday from the Reserve Bank of Australia, whose monetary policy board felt a Q3 CPI reading of 5.0 percent or more was likely. The minutes of the RBA board's October meeting, released yesterday, indicated the bank expected CPI to remain high until 2009, when it was expected to begin to moderate. In its October meeting, the RBA board reduced interest rates by a full percentage point to 6.0 percent.
In a separate public appearance yesterday, RBA Governor Glenn Stevens added that inflation was "likely to remain high in the period immediately ahead."
The NZ dollar declined on expectation that the Reserve Bank of New Zealand will slash its interest rate by around 1 percentage point tomorrow. The interest rate cut is expected to help boost the economy amid a rapid deterioration in the global economy and markets. Bollard has cut the benchmark interest rate by three quarters of a point to 7.5 percent since July.
Against the yen, the dollar declined to a 6-day low today as a fall in stock prices prompted investors to sell higher-yielding assets funded in Japan. At about 12:30 am ET, the dollar-yen pair touched 99.55, down from yesterday's close 100.15. If the dollar-yen pair slides further, 99.2 is seen as the next target level.
In economic news, the index monitoring overall industrial activity in Japan fell 1.8 percent month-over-month in August, the Ministry of Economy, Trade and Industry said today. That was slightly worse than analysts' expectations of a 1.7 percent monthly fall after a 0.8 percent jump in July.
Looking ahead, the Italian August retail sales report is due at 4:00 am ET. Italian retail sales are forecast to fall 0.7% annually in August after rising 2.1% in July. At the same time, retail sales are predicted to remain flat on a monthly basis.
Following the Italian report, the Bank of England is scheduled to release the minutes of the special meeting held on October 8. In a coordinated effort with other major central banks, the Bank of England had cut the official Bank Rate paid on commercial bank reserves to 4.5%.
In the Monetary Policy Meeting held on September, policymakers were not unanimous in holding the interest rate in the rate setting session. The policy makers voted 8-1 to hold interest rate at 5%. The dovish David Blanchflower was the only member who voted for a reduction. He even preferred a 50 basis points cut, while he had called for a quarter point reduction in August.
At 5.00 am ET, Eurostat is expected to issue the budget deficit and debt data for Eurozone.
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May 22, 2026 14:46 ET Minutes of the latest Fed policy session was the highlight of the week along with survey data on the U.S. housing market. In Europe, survey data signaled the trends in the euro area private sector. Further, consumer price inflation data from the U.K. was in focus. In Asia, various economic indicators from China drew attention to the health of the economy.