Business

Published: Thursday October 22, 2009 MYT 8:01:00 AM
Updated: Thursday October 22, 2009 MYT 12:06:50 PM

Dollar's fall renews fears of higher oil prices


WASHINGTON (AP) - Hitting a 14-month low against the euro, the sinking dollar renewed concerns Wednesday about higher oil prices and other inflationary threats.

A lower dollar can help U.S. manufacturers by making their exports cheaper for foreigners to buy. It also benefits factories in China, which pegs its currency to the dollar. But a weakening dollar hurts European businesses because their goods become relatively more expensive.

Since early March, when the dollar hit a high for the year against the euro and other major currencies, it has declined about 12 percent against a basket of major currencies.

On Wednesday, the dollar's value against the euro fell below the psychological barrier of $1.50. In response, oil prices jumped to a new high for the year, settling at $81.37 a barrel.

Crude oil is priced in dollars. So when the dollar falls, oil producers demand a higher dollar price to make up for the lost purchasing power relative to other currencies, such as the Japanese yen or the euro. Oil, which was trading below $70 a barrel in early October, has been rising steadily as the dollar has fallen.

The euro, the common currency of 16 European nation's peaked Wednesday at its highest level since August 2008. One euro cost $1.5046, up from $1.4928 in late trading Tuesday.

Many analysts saw the euro's movement above $1.50 as a milestone that could put further pressure on the greenback.

The dollar also continued falling against some other currencies, dropping against the British pound, the Canadian dollar and falling to the lowest levels in more than a year against the Swiss franc, the Australian dollar and the New Zealand dollar.

The fall in the dollar is occurring as the federal government's budget deficit hit $1.42 trillion in the fiscal year ended Sept. 30.

The administration worries that a falling dollar could spoke foreign investors, including the Chinese - the largest foreign holder of Treasury securities - into dumping their dollar-denominated assets.

That could send the dollar into a tailspin, push interest rates up and send stock prices plunging.

But economists stressed that they see that as a worst-case scenario they don't expect to occur. So far, they noted, the dollar's decline has been orderly, returning to levels that preceded the financial crisis.

Mark Zandi, chief economist at Moody's Economy.com, and other analysts noted that the weaker dollar should be a boon for U.S. manufacturing companies because their products will be cheaper in overseas markets. For a manufacturing sector still struggling to recover from the U.S. recession, that would be a major benefit.

Nariman Behravesh, chief economist at Global Insight, a private forecasting company, said he thinks the dollar will keep gradually declining against the euro and other major currencies.

"I am not terribly worried about it," he said. "The dollar is going to keep depreciating, but it is not going to collapse. This is not a crisis of confidence."

The dollar's decline has been widespread against most major currencies.

A notable exception is the Chinese yuan.

The Obama administration has exerted pressure to let the yuan rise in value against the dollar to help close a huge trade gap between the United States and China. The Chinese government has essentially frozen the yuan's value over the past year.

A weaker dollar will make the price American consumers pay for foreign-made televisions and autos more expensive.

But most analysts say they don't think it will fuel inflation, because of the economy's weakness.

As the economy strengthens, the Federal Reserve is likely to begin raising short-term interest rates to fend off inflation.

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