- The Washington Times - Wednesday, September 12, 2007

BERLIN (Associated Press) The dollar fell to a new all-time low today in late European trading amid speculation that the Federal Reserve will soon cut interest rates and on a warning from the U.S. treasury secretary that turbulence in financial markets may linger.

The 13-nation euro rose as high as $1.3901 in late afternoon European trading topping its previous record of $1.3852, reached on July 24. It almost immediately fell back to $1.3889, compared with the $1.3832 it bought in New York late yesterday.

The sudden surge came after Treasury Secretary Henry Paulson, speaking to officials from some of the biggest financial firms in the U.S., said that volatility in financial markets will take some time to be resolved, particularly in the area of subprime mortgages.

“We have been experiencing market turbulence, and as I have said for awhile, it is going to take some time to work its way out,” Mr. Paulson said at a meeting at the Treasury Department. “We are going to work our way through this, in some markets more quickly than others.”

The euro’s strength threatens to make European exports more expensive, and therefore less competitive although the currency’s movements this year have been gradual rather than abrupt.

The strong euro “is weighing on growth,” French Budget Minister Eric Woerth said after a Cabinet meeting in Paris today.

While the weaker dollar makes U.S. exports more competitive, it diminishes the spending power of American tourists in Europe.

The dollar, which has hovered within a few cents of its record low over recent weeks amid the market turmoil caused by the subprime mortgage crisis, had come under new pressure since the U.S. Labor Department issued unexpectedly poor August jobs data on Friday.

That report strengthened speculation that the Fed will cut interest rates at its Sept. 18 meeting by as much as half a percentage point. A cut from the current rate, 5.25 percent, would be the first reduction in four years.

“Traders continue to second-guess how (Fed Chairman Ben) Bernanke and his team will act” next week, said James Hughes, a market analyst at CMC Markets.

Lower interest rates, used to jump-start the economy, can weaken a currency by giving investors lower returns on investments denominated in the currency.

Bernanke offered no hints during a speech in Germany yesterday.

“The fact no mention of monetary policy was made in yesterday’s speech in Berlin has done little to placate the market, and we’re also seeing growing speculation that the Fed may elect to cut rates by a half a point as they try to steer the economy away from recession,” Mr. Hughes said.

The European Central Bank last week put its own two-year run of gradual interest rate rises on hold, but left many economists still expecting a quarter-point increase from the current 4 percent before the end of the year.

The dollar was lower today against the British pound, drifting down to $2.0296 from its level of $2.0317 in New York late yesterday.

The U.S. currency was lower against the Japanese yen, even as Prime Minister Shinzo Abe announced that he would resign, putting an end to his troubled year-old government. The dollar ambled down to 114.27 yen from 114.30 yen.

At Berlin’s Brandenburg Gate, American newlyweds Doracy and Russell Harrison said the unfavorable exchange rate had prompted changes in their plans.

“Accommodation is where you really feel it,” said Doracy Harrison, 27, of Raleigh, North Carolina, a program manager at an aquatic center.

“We probably wouldn’t have come if were weren’t staying with friends. We haven’t been as gung-ho about eating out and have planned on low-key cafes instead of nicer places we’d usually eat.”

Associated Press writer Kristen Allen in Berlin contributed to this report.

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