Dollar slides towards euro parity and hits $1.50 against sterling

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The Independent Online

Sterling briefly broke through the psychologically important $1.50 barrier yesterday for the first time in 17 months as the popularity of the greenback continued to wane amid fears that America's economic recovery is losing momentum while its equity markets are in decline.

Sterling briefly broke through the psychologically important $1.50 barrier yesterday for the first time in 17 months as the popularity of the greenback continued to wane amid fears that America's economic recovery is losing momentum while its equity markets are in decline.

The pound hit a high of $1.5017, before falling back later in the day to trade marginally down at $1.4964. The dollar's weakness also helped the euro push above $0.97 to reach its highest level in 26 months.

The euro's fresh gains against the greenback led many traders and economists to predict the European single currency could soon reach parity with the dollar, a level last seen in January 2000. Economists at Deutsche Bank predicted parity would be reached by December while others saw the euro hitting $1.00 within weeks.

"We're seeing further evidence that sentiment on the dollar has changed. We see parity by the end of the year," said Ryan Shea, senior international economist at Bank One. "The US is still heavily reliant on overseas capital and this is turning fairly negative."

The euro, which has gained nearly 9 per cent against the dollar so far this year and four US cents in the past month, traded as high as 97.06 cents, its highest level since April 2000.

Analysts and currency traders said they expected the pound to continue climbing against the dollar next week. Sterling has gained more than 5 per cent against the US currency in the last three months and is 3 per cent above its level at the turn of the year.

"There was a bit of profit-taking but it [sterling] still seems quite firmly bid so I suspect we'll see it back through $1.50 before too long," one London-based trader said.

Phil Roberts, Barclays Capital's technical analyst, added: "The general story is one of dollar weakness, and the yen was strengthening, which took everyone by surprise."

The dollar was trading at seven-month lows against the Japanese yen and slid to 29-month lows against the Swiss franc. News out earlier in the week that America's trade deficit widened in April to $35.9bn, up from $32.5bn in March, has damaged sentiment. Demand for imports in the world's biggest economy outstripped demand for domestic goods and services, sending the deficit to its widest since records began 10 years ago.

The sharp decline in the value of US equities has also reduced the attractiveness of the dollar. The S&P 500 index has dropped by about 12 per cent since 1 January, while the Dow Jones industrial average has lost around 6 per cent and the technology-laced Nasdaq has given up roughly a quarter of its value. All three of the key indices are retreating for the third year in a row. Yesterday the Dow was down 112 points at 9,319 in midday trading.

Seth Garrett, manager of global foreign exchange trading at Credit Suisse First Boston, said: "There's a general feeling that the money may not be being attracted to the States, so the dollar is going to continue to stay soft."

Meanwhile, traders said the greenback's retreat against the yen raised concerns that Japan could soon resume sales of its currency in a bid to help its exporters. The dollar fell by 0.75 per cent to 122.27 yen, its lowest since November.

Japan has sold its currency on at least four days in the past few weeks to curb the yen's export-harming strength, most recently on 4 June.

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