US dollar falls to 14-month euro low

LONDON — The dollar slid to a 14-month low against the euro Wednesday as investor appetite for risk increased following upbeat comments from Intel Corp. and after a top Federal Reserve official indicated U.S. interest rates would likely remain low for a quite a while.

By early afternoon London time, the euro was trading 0.3 percent higher on the day at $1.4896, just down on the 14-month high of $1.4913 it hit earlier in the session.

Meanwhile, the dollar was 0.5 percent lower against the Japanese currency at 89.20 yen.

As usual since the financial crisis became most acute just over a year ago, the dollar has been sold off heavily at as stock markets have rallied strongly, and faltered more ahead of what was expected to be a strong opening on Wall Street following further signs of an economic recovery in China and optimistic statements from Intel, the world’s largest chip maker.

Dollar investments such as U.S. Treasuries are seen a safe haven in times of anxiety. But as doubts fade, money moves out of dollars and into riskier and potentially more profitable investments such as stocks and commodities, sending the dollars’ exchange rate down.

Further undermining the dollar were comments from the U.S. Federal Reserve’s vice chairman Donald Kohn.

In a speech in St. Louis, Kohn hinted that interest rates in the U.S. — currently the benchmark federal funds rate stands at an all-time low of between 0-0.25 percent — would remain low for an extended period and that a “V-shaped recovery is not the most likely outcome.”

Neil Mackinnon, global macro strategist at VTB Capital in London, said as long as the Fed continues its expansive monetary policy then the dollar would remain under pressure, as cheap dollars are being used to fund potentially lucrative purchases in stock and commodity markets.

“Until the Fed turns off the liquidity tap, these trends will remain in place and the likelihood is that the dollar will continue to fall,” he said.

The minutes to the last meeting of the rate-setting Federal Open Market Committee are due to be published later and the markets will be closely monitoring them to get a clearer idea on how the Fed plans to eventually withdraw monetary measures enacted since the credit crisis began over two years ago.

Last week, the markets were excited by comments from Fed chairman Ben Bernanke that the central bank has to be ready to raise interest rates and take back the trillions of dollars it has pumped into the money markets to boost liquidity. The dollar briefly rose.

The U.S. currency, which has been falling for the best part of eight years, has been under particular pressure in recent weeks amid growing talk about its future as the world’s reserve currency.

Recent figures from the International Monetary Fund showed that the dollar’s share of total reserves has fallen to its lowest level since 1995. Meanwhile, Robert Zoellick, a former U.S. trade representative who now heads the World Bank, warned that the currency’s status as the world’s leading reserve currency should not be taken for granted.

The dollar’s ongoing falls against many of the world’s leading currencies, with the notable exception of many of Asia’s currencies, which are effectively pegged to the dollar by governments in the region, is beginning to cause mounting concerns in the capitals around the world if the rising rhetoric is any guide.

Over the last 24 hours or so, Japan’s senior vice finance minister Naoki Minezaki said dollar weakness was likely to persist, while Canada’s Prime Minister Stephen Harper voiced his concern about the rise in the Canadian dollar. And New Zealand’s finance minister Bill English said the Kiwi dollar’s ongoing strength raised questions over the recovery.

Simon Derrick, currency strategist at Bank of New York Mellon, said more concerns are likely to be voiced in the weeks leading up to the Group of 20 finance ministers meeting in Scotland in early November. European governments worry that a rising euro will choke off the fledgling economic recovery in the 16 countries that use the euro.

A rising euro raises the cost of European goods in the U.S. and so could dampen any European recovery.

Derrick said the Europeans will likely join the Japanese to urge the U.S. to say enough is enough and intervene to halt the dollar’s eight-year slide.

The question is, will Timothy Geithner, the U.S. Treasury secretary, be any more likely to support the dollar’s exchange rate than his predecessors, most notably John Snow.

Five years ago, Snow put an end to any notion of a multilateral response to the dollar’s decline by stating that the history of managed exchange rates had a patchy record.

Derrick thinks that Geithner will say something very similar “unless the dollar is truly collapsing” and that, as a result, the dollar will continue to fall over the months ahead — and that the euro could break its all-time of $1.6038.