Dollar sinks to 14-month lows on recovery signals

NEW YORK — The dollar continued its tumble Wednesday as markets rallied on positive earnings and Chinese trade data, while a Federal Reserve official reiterated that U.S. interest rates would stay low. The greenback sunk to 14-month lows versus the euro and Australian dollar, a 13-month low against the Canadian dollar and moved lower against the Japanese yen.

The dollar has been falling steadily this spring as the world economy recovers. After the collapse of Lehman Brothers, the buck had surged higher, peaking in March as spooked investors cut their holdings of riskier emerging-market assets and dove for the safety of the dollar and the U.S. government debt it can buy.

But now that several countries’ economies are growing again, and analysts expect U.S. GDP growth of 3 percent in the third quarter, investors are more willing to engage in risky trading such as borrowing the dollar to buy better-yielding currencies.

The momentum could send the euro through $1.50 in the next few days, a psychologically important level that would propel a wave of dollar selling, said Matthew Strauss, senior currency strategist at RBC Capital in Toronto.

What specific signals augured recovery on Wednesday? In the U.S., better-than-expected earnings from bank JPMorgan Chase & Co. and chip maker Intel Corp. drove stock markets higher, while the Chinese government said the country’s export decline slowed last month, signaling a resumption in global trade.

The Dow Jones industrial average has reclaimed 10,000 for the first time in a year. The comeback by the stock market’s best-known indicator is the most visible sign yet that investors believe the economy is indeed recovering from the financial crisis and recession.

Gold, meanwhile, hit another record high of $1,072 an ounce. The dollar often trades in opposition to equities, while gold is used as a hedge against a dropping buck and possible future inflation.

The 16-nation euro peaked at $1.4920 Wednesday, trading down to $1.4885 later in the New York session, from $1.4829 late Tuesday. That’s its highest point since last August. Meanwhile, the dollar dropped to 89.43 Japanese yen from 89.76 yen and a 13-month low of 1.0250 against the Canadian dollar, while the Australian dollar peaked at a 14-month high of 91.57 U.S. cents.

On Tuesday, Federal Reverse Vice Chairman Donald Kohn reiterated the Fed’s stance that the key interest rate was going to stay at its current range near zero for some time amid a slow, modest recovery and still-climbing unemployment.

Investors had gotten excited last week when Chairman Ben Bernanke said the central bank would wind down stimulus measures and tighten monetary policy to ward off inflation, momentarily propelling the buck.

The U.S. interest rate is one of the lowest of the major economies. That’s driving investors to shun the dollar for higher-yielding currencies, such as the Australian dollar and the euro.

Earlier this month, Australia became the first major economy to raise interest rates, to 3.25 percent from 3 percent.

Analysts expect Norway and South Korea to raise rates soon as well.

The minutes to the last meeting of the rate-setting Federal Open Market Committee will be released later today. Markets will be watching to get a clearer idea on how the Fed plans to eventually end monetary measures enacted since the credit crisis began over two years ago.

Some analysts think an increase in U.S. interest rates may come as soon as the winter of 2010 as the buck plummets and a recovering economy inflates fears of rising prices.

“With the (dollar) in a downward spiral, the Fed may well act sooner rather than later, and faster rather than slower,” said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon. He sees a rate increase as soon as the first quarter, and when that occurs, the dollar will recover, he said.

In other New York trading, the British pound rose to $1.5986 from $1.5901 late Tuesday, and fell to 1.0147 Swiss francs from 1.0230 francs. Earlier Wednesday, the greenback hit its lowest point against the franc since July 2008 at 1.0145.

AP Business Writer Pan Pylas contributed to this report from London.