No end in sight to dollar's descent

Sterling powered to its highest level against the dollar yesterday since its humiliating ejection from Europe's exchange rate mechanism 11 years ago as the American currency entered the new year facing a renewed wave of selling.

Weekend comments by a senior Federal Reserve official signalling that the US central bank was likely to stick to its policy of rock bottom interest rates triggered the dollar rout.

Traders dumped the greenback after Ben Bernanke, a member of the Federal Reserve Board, told a weekend meeting of American economists that the Fed had "the luxury of being patient".

Mr Bernanke's comments sent the dollar to a fresh record low of $1.2695 against the euro and $1.8065 against the pound - its lowest level since Black Wednesday in September 1992.

The Federal Reserve cut borrowing costs to a 54-year low of 1% last June. The American authorities appear to be in no hurry to follow the example of central banks in Britain and Australia, which have already begun raising rates in response to improving global growth.

"We have an economy growing quite nicely, but the Fed is showing no intention of hiking rates," said Hans Guenter Redeker, the chief foreign exchange strategist at BNP Paribas in London.

The low level of American rates has reduced the appeal of investing in the dollar at a time when the US needs to attract growing sums of over seas investment to fund its current account deficit. "If the Fed does not see a weak dollar as an inflationary threat, it has little reason to raise interest rates and the trend of dollar weakness will continue," said Shahab Jalinoos, a senior currency strategist at ABN Amro.

Analysts said that the greenback's decline was likely to continue, with the US authorities apparently relaxed about the currency's fall and worries about the country's ballooning current account deficit weighing on the market.

"There is a general feeling in the market that there is little to stop the dollar's fall," said Adam Cole, a senior currency strategist at Crédit Agricole Indosuez.

But the damage the soaring euro is inflicting on exports is causing growing concern in Europe's capitals.

German officials want finance ministers from the seven leading economies to discuss the dollar when they meet in Florida in early February, G7 sources said. Analysts said the key to the meeting would be the stance of Washington, which has so far kept mum on the weak dollar.

"The dollar's fall has been orderly so far, but if it breaks through technical support levels at around $1.28, it could easily accelerate," said Nick Parsons, a currency strategist at Commerzbank.

"If it starts to hit the stock or bond markets, the US attitude would turn on a dime," he added.

Mr Bernanke said it was a mistake only to look at the dollar's sharp drop against the euro, adding that the greenback's fall against a broad basket of currencies had been much smaller. The risk of a "dollar crisis" was low, he maintained.

While European companies which depend on exports to the US are suffering from the high euro, they are coping better than expected, said a spokesman for Germany's association for exporters and foreign trade, André Schwarz.

"The situation is not so dramatic," he said, noting that demand for European goods remained strong.