Dollar slumps further, eliciting fear in Europe

The dollar continued to slide against its major rivals Monday, but the decline slowed from last week’s speedy pace.

In Europe, export-related stocks fell sharply on concerns that the strengthening euro currency would make the continent’s manufactured goods too expensive for some U.S. consumers.

Some European politicians expressed alarm about the currency market’s gyrations.

The euro rose to a 20-month high of $1.313 in New York from $1.309 on Friday.

The British pound ended at a two-year high of $1.937, compared with $1.932 on Friday.

The dollar rebounded slightly against the Japanese yen, however. One dollar was worth 116.08 yen, up from 115.75 on Friday.

The U.S. currency began to tumble Wednesday after mostly treading water in recent months.

One trigger for the sell-off was the expectation among many currency traders that the gap between European and U.S. interest rates would keep narrowing, analysts said.

European economic data have been surprisingly robust in recent months, while U.S. data have been mixed, leading market participants to believe that the European Central Bank will continue boosting short-term rates and the U.S. Federal Reserve may begin cutting rates.

Higher interest rates tend to increase the appeal of a country’s money-market securities and bonds, in the process lifting its currency.

The European Central Bank is expected to raise its benchmark rate to 3.5% from 3.25% when policymakers meet Dec. 7. The Fed has been holding its key rate at 5.25% since June.

Some currency traders had been warning that the dollar was overdue for a slide, given the weaker U.S. economy.

“The dollar bears are going, ‘I told you so,’ and the dollar bulls are standing there in disbelief,” said David Durrant, chief strategist at Julius Baer Investment Management.

Also weighing on the dollar have been fears that some major foreign central banks want to reduce their holdings of dollardenominated securities.

China, in particular, has indicated that it wants to better diversify its foreign-exchange reserves, which total about $1 trillion and are largely held in dollars.

“We’ve heard out of China, Russia, Sweden, and other central banks the desire to hold a smaller proportion of reserves in U.S. dollars,” said Michael Woolfolk, senior currency strategist at Bank of New York.

A weaker dollar makes foreign goods more expensive for U.S. consumers, unless the manufacturers are willing to hold the line on prices and accept a smaller profit margin.

The dollar’s drop “will lead to analysts adjusting their numbers in the euro zone down for earnings forecasts for the fourth quarter,” said Gary Dugan, head of research at Barclays Wealth Management in London.

On the flip side, the dollar’s devaluation could help some U.S. exporters by making their goods more competitive with those of foreign rivals.

Concern about the effect of the euro’s strength on European exports slammed the continent’s stock markets Monday. Germany’s DAX index fell 1.8%, compared with a 1.3% decline in the Dow Jones industrial average. The French market’s CAC index dropped 1.5%.

But the euro pulled back somewhat after French Finance Minister Thierry Breton said at a meeting of European finance ministers in Brussels that it was important for policymakers to be “highly vigilant” given the dollar’s troubles.

“I expect to hear more comments from European officials trying to put some brakes on a rapid appreciation on the euro,” said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington. “But chances are that the dollar slide will continue because we all know [interest] rates are going up in Europe.”

For U.S. investors who own foreign stocks or bonds, a weaker dollar can be a bonus: Securities denominated in rising currencies are worth more when translated into dollars. That can add to gains when foreign markets are rallying and reduce losses when those markets are falling.

Over the last five trading days, a Bloomberg News index of 500 European blue-chip stocks has fallen 2.4% in euros but is 0.1% higher measured in dollars.

U.S. individual investors have been big buyers of foreign stocks over the last two years. They have pumped six times as much net cash into foreign mutual funds as they have into U.S. stock funds this year, according to Financial Research Corp.