US Dollar slumps to new lows in credit crunch uncertainty

The US dollar languished at all time lows against the euro and slumped to parity with its Canadian cousin for the first time in 31 years as it succumbed to a sell-off in the wake of the Fed's aggressive rate cut for a third day running. The euro broke through the 1.40 usd level early yesterday and found enough momentum to close in on 1.41 usd.

There were other reasons for the dollar's losses as well. Speculation is rife that oil-rich Saudi Arabia may move away from pegging the riyal to the dollar. The Arab nation did not cut interest rates after the Federal Reserve's 50 basis point reduction Tuesday, further fuelling the rumours.

An article in the Daily Telegraph suggested that the Saudis are preparing to break out of the dollar currency peg, something which would spark a 'stampede' out of the dollar across the Middle East.

Against this backdrop, Fed Chief Ben Bernanke's words that the fallout in the US sub-prime market will continue. Delinquencies and foreclosures in the sub-prime mortgage market are likely to rise further, Federal Reserve Chairman Ben Bernanke warned a Congressional hearing yesterday.

His comments offset any benefit for the dollar from a more upbeat US Treasury Secretary Henry Paulson, who continued to downplay the credit crisis, telling members of Congress that the US is poised for continued economic growth.

Many analysts predict that US rate setters will have to reduce interest rates again to keep US growth on track.

Elsewhere, the Pound recovered moderately after strong UK retail sales data and a better-than-expected manufacturing survey decreased the likelihood that the Bank of England will cut interest rates soon.

The Office for National Statistics reported that retail sales in August rose 0.6 % on the month, just below July's 0.7 % gain but well above analysts' forecasts for a 0.1 % rise.

Meanwhile, there was further good news on the manufacturing sector from a better-than-expected survey from the Confederation of British Industry, while data showing strong money supply growth will make it even more difficult for the Bank to justify cutting interest rates.

Focus yesterday, however, centred on Bank of England governor Mervyn King's testimony before MPs on the Treasury Select Committee where he was grilled on the central bank's much criticised response to the Northern Rock crisis.

Rumours had been circulating that King could be forced to resign over the issue, but in the event King was seen as giving a good account of himself as he shifted the blame onto legislation, especially the Market Abuses Directive, which prevented his 'preferred' measure of using a covert lender of last resort operation.

Some analysts found comfort in King's assertion that the central bank will not be taking short-term options.

Comments from other rate setters at yesterdays hearing also appeared to indicate support for King's view. Kate Barker, the resident housing expert, said UK mortgage repossessions are 'not alarming'' despite recent rises in defaults, adding the housing market remains 'relatively robust.'

Finally, The Canadian dollar reached parity with the U.S. dollar yesterday for the first time since November 1976. This week the CAD rose sharply against its U.S. counterpart after the Federal Reserve announced a dramatic half-point cut in its benchmark interest rates.

The Bank of Canada, meanwhile, has kept its equivalent rates stable. As a result, the spread between U.S. and Canadian interest rates widened, making Canada a more attractive place for German, Japanese, American and other foreign investors to put their money.

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