Foreign investors’ doubts about the U.S. economy are driving a fresh sell-off of the dollar in favor of other major currencies.
The euro hit a four-year high against the dollar Thursday, while the Canadian dollar hit a five-year high and the Australian dollar reached a three-year high.
The U.S. currency’s renewed weakness is potentially good news for American exporters because it can make their goods less expensive for foreign buyers. But it will make traveling abroad much more expensive this summer if it continues.
Sluggish U.S. economic growth combined with speculation that American interest rates are too low to attract foreign investors may lead the dollar to extend it slide in the near term, some analysts said.
Traders sold the U.S. currency Thursday after the Institute for Supply Management’s factory index showed manufacturing contracted in April for a second month, while the government reported that new claims for jobless benefits remained last week at a relatively high level.
In theory, investors want to put their money into the strongest economies while avoiding weaker economies. Currency values often reflect those investing decisions.
But foreign investors lately may be driven by a more practical matter: If they’re searching for decent yields on fixed-income securities such as bonds, they’re more likely to find them in Europe, Canada and Australia than in the United States.
The Federal Reserve’s overnight interest rate target is at a 41-year low of 1.25%, which is keeping other rates down as well.
By contrast, the European Central Bank’s short-term rate is 2.5%. The Bank of Canada’s rate is 3.25% and the Reserve Bank of Australia’s rate is 4.75%.
“If you look at the interest rate differentials, that tells your whole story” of what’s driving dollar losses, said Gary Barth, assistant treasurer at United Parcel Service Inc. in Atlanta. As for the U.S. economy, he said, “The jury’s out on when it’s really going to start running.”
Thursday marked the third straight decline for the dollar against the euro, which rose to $1.124 from $1.118 on Wednesday. At the start of the year the euro was worth $1.05.
The Canadian dollar was worth 70.4 U.S. cents on Thursday, up from 69.8 cents on Wednesday. The Australian dollar’s value in U.S. cents rose to 63.1 from 62.6.
Among the seven major industrialized nations, only Japan, which is struggling to rebound from its third recession in a decade, has lower interest rates than the United States.
“We continue to be bearish on the dollar,” said Rebecca Patterson, currency strategist at J.P. Morgan Chase & Co. “This trend will continue until you see a broader-based recovery in the economy, which will attract more foreign capital flows into the U.S.”