May 27 (Bloomberg) -- The dollar fell to a record low against the euro as comments by European officials reinforced speculation they are not concerned about the euro's gain against the dollar. The U.S. currency fell to $1.1892 per euro at 10:32 a.m. in New York from $1.1876 yesterday, after earlier trading as low as $1.1933, its weakest since the euro's inception in January 1999.
Europe's 12-nation common currency level is ``consistent with historical averages over the last 15 years,'' said Lucas Papademos, vice president of the European Central Bank. An exchange rate of $1.18 is ``competitively neutral'' for exports, said Bundesbank President Ernst Welteke. U.S. Treasury Secretary John Snow suggested this month U.S. officials are content to see the dollar weaken as it hasn't resulted in higher interest rates or stemmed the rally in the stock market. ``We have not approached the pain threshold yet'' for European policy makers, said Marc Chandler, chief currency strategist for HSBC Bank USA in New York. The dollar, which is down 12 percent against the euro this year, is likely to reach $1.20 per euro in the coming days, Chandler said.
Japan's currency rose to 116.46 yen per dollar from 116.85. The U.S. currency has fallen against the euro for seven weeks running. Its decline accelerated last week after Snow suggested U.S. officials are receptive to the economic benefits of a weaker dollar. Still, the U.S. Dollar Index, the average value of the dollar against six major currencies, is at 92.47, down from about 120 in March 2001, though still up from about 81 in 1995. The index averaged about 92 during the 1990s.
Consumer Confidence
The dollar briefly extended its decline after an industry report showed U.S. consumer confidence rose less than expected in May, feeding concern U.S. economic growth will remain sluggish. The Conference Board's consumer confidence index rose to 83.8, the highest since November, from 81 in April. Economists polled by Bloomberg News forecast it would rise to 84, on average. Comments by Papademos and Welteke downplayed the extent to which the euro's gains will curb exports, which account for a fifth of the region's gross domestic product, according to the European Union's statistics office. These comments ``ease concerns'' the ECB will take action to curb the euro's rise, said Michael Klawitter, a currency analyst at WestLB in London. At the same time, Dutch central bank President Nout Wellink said on Friday a further quick gain would hurt exports and Luxembourg's Yves Mersch said the euro has already advanced ``too fast'' against the dollar. Welteke, too, has said exporting has become more difficult compared with last year.
Import Prices
A stronger euro, while cutting foreign demand for European products, lowers the prices of imports to Europe, pushing the overall inflation rate lower, analysts said. It also helps to import some inflation to the U.S. at a time central bankers said they are concerned inflation is slowing too quickly. ``Europe for several years has been fighting inflation, and they have inflation still above'' the European Central Bank's target rate of about 2 percent, Greg Anderson, senior foreign exchange strategist at ABN Amro Inc. in Chicago said on Bloomberg Radio. ``These countries will have inflation rates decline as a result of a rising currency.'' European officials may express concern if the euro rises above $1.20, though worries about the U.S. current account and budget deficits and the apparent change in the U.S. dollar policy may push the euro to as high as $1.30 by the end of the year, Klawitter said. Royal Philips Electronics NV, Siemens AG and Pernod Ricard SA are among European exporters whose sales have been hurt by the rising euro. For every 10 percent drop in the dollar, company earnings are cut by an average 4 percent, Goldman Sachs & Co. estimates.
ECB `Irresponsible'
``The euro rally will end in tears'' for Europe's economy, said WestLB's Klawitter. ``It's irresponsible of the ECB'' to appear so unconcerned with the currency's gain. ``Companies are clearly feeling the pain'' of the stronger euro. The euro's rise may be curbed on expectations the ECB will cut its key interest rate next week, reducing deposits on assets denominated in euros, some analysts said. Speculation the ECB will pare its main rate from 2.5 percent mounted after Europe's $8 trillion economy ground to a halt in the first quarter. Inflation in the euro region will be ``clearly below'' the bank's 2 percent ceiling next year, Papademos added to his earlier comments. The bank next meets to decide on interest rates on June 5.
A rate cut would narrow the premium euro-denominated deposits have over those denominated in dollars. Deposits in the 12 countries sharing the euro pay 2.3 percent, compared with 1.23 percent in the U.S.
Rate Speculation
``Speculation the ECB may cut rates next week and expectations of strong U.S. economic data tonight'' may bolster the dollar, said Shuji Takano, senior foreign exchange manager at Aozora Bank Ltd. in Tokyo. ``The market expects at least a 25- basis-point rate cut'' next week, he said. The rate on the June Euribor interest-rate futures contract has fallen 14 basis points to 2.17 percent in the two weeks through yesterday, suggesting traders have factored in at least a quarter-point rate cut at next week's ECB meeting. A basis point is 0.01 percentage point. //www.bloomberg.com