Sell-off triggers fresh slide in dollar

US currency falls to low against euro as markets decide Bush has abandoned 'strong dollar' policy
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The Independent Online

The dollar tumbled across the board yesterday, falling to its lowest level against the euro since its launch and triggering a sell-off on stock markets.

The dollar tumbled across the board yesterday, falling to its lowest level against the euro since its launch and triggering a sell-off on stock markets.

It fell against all its main trading currencies as the financial markets decided the US had abandoned its "strong dollar" policy. The currency plunged immediately the markets opened in Japan as traders rushed to sell on the back of comments by John Snow, the US treasury secretary.

After the meeting of finance ministers of the G8 group of rich nations, he said the exchange rate reflected "the fundamentals of the demand and supply for currencies". Mr Snow distanced himself from previous treasury secretaries Robert Rubin and Paul O'Neill, both of whom preached a strong dollar policy. "I don't know how [Rubin] defined it," he said. "I've never had that conversation with Paul." Ian Shepherdson, at High Frequency Economics in New York, said: "That was the green light to sell the dollar."

The US dollar plunged two cents from Friday's close to hit $1.1740 against the euro, identical to the single currency's launch value on 4 January 1999, according to HSBC bank. It fell as low as 115.10 Japanese yen, its lowest since February 2001, until rumours of intervention by the Bank of Japan pushed it back up. It dropped to a five-year low against the Swiss franc and a three-month low of $1.636 against the pound.

Economists said the dollar would plunge further as the markets continued to implement a long-awaited correction. David Bloom, a global economist at HSBC who believes the dollar will hit $1.25, said: "We are at the beginning of a multi-year dollar bear market and Snow's comments at the G8 just added to that. It is tacit acceptance of a weaker dollar."

Economists said a weaker dollar was exactly what the US economy needed. Mr Shepherdson said: "What is the point of talking up the dollar at a time when you are keen to stimulate growth, keen to diminish deflation expectations and keen to kick Europe where it hurts?" The dollar has plunged around 17 per cent since the start of this year on growing evidence of a weak economic recovery and mounting concerns over its current account and budget deficits.

The White House stuck to the official policy yesterday supporting a strong dollar but pointedly refused to define its exact aims. Analysts believe the US administration is happy with a devaluation that will fuel growth at a time when all major economic blocs are mired in recession.

Alex Patelis, a senior foreign exchange strategist at Merrill Lynch, which expects the euro to hit $1.31, said: "The Treasury does not see the decline in the dollar as a threat to the objective of stimulating global growth. The weaker dollar puts pressure on those regions to focus on improving internal demand, which is precisely the outcome that Snow has pushed to achieve since his first G8 meeting."

The US wants Japan and the eurozone to embark on radical reform to eliminate inflexibilities and for the European Central Bank to cut rates. The unofficial US policy has won the backing of Europe's political leaders who have backed a "strong and stable" euro exchange rate - despite the impact it will have on exporters.

Francis Mer, the French finance minister, added to the chorus calling on the European Central Bank to cut rates on 5 June. "I have the impression it has acknowledged that everything points towards a policy of softening," he said yesterday.

The shift in policy combined with mounting anxiety over the seemingly endless strong of terrorist outrages and fresh weak economic data to trigger a sell-off on world markets.

On Wall Street, the Dow Jones slumped 2 per cent by midday trading while in London the FTSE 100 lost 2.7 per cent. In Germany, which the International Monetary Fund said faced a "considerable" risk of deflation, the stock market crashed almost 5 per cent.