Dollar under pressure as EU warns on euro rise

October 7, 2010

, LONDON, Oct 7 – The euro rose sharply on Thursday as the European Union warned that its strength could undercut economic recovery and the IMF head highlighted the threat of a destabilising currency war.

The euro jumped close to 1.40 dollars and the dollar plumbed fresh 15-year lows against the yen on persistent concern about the US economic outlook.

Decisions by the European Central Bank and the Bank of England to keep record low interest rates unchanged were as expected, with markets waiting for ECB comment on the outlook.

In early afternoon London trading, the European single currency was at 1.3970 dollars, off an early high of 1.3997 dollars, its best level since the beginning of February and up from 1.3928 dollars in New York late Wednesday.

Against the Japanese currency, the dollar slumped to 82.39 yen, levels last seen in May 1995 and below the rate which triggered Japanese intervention to push it lower for the first time in six years on September 15.

The dollar\’s tumble meanwhile allowed gold to strike yet another record high, this time at 1,364.77 dollars an ounce as investors sought out the metal\’s traditional safehaven qualities.

The European Commission said the rise of the euro was "disproportionate" and could affect economic recovery across the bloc.

"We consider that the euro is currently bearing a disproportionate burden in the adjustment of the global exchange rate … (and) that this may affect recovery of the European economy," commission spokesman Amadeu Altafaj said.

He also reiterated that China\’s yuan was "still significantly undervalued."

Dealers said the market was also digesting comments from International Monetary Fund head Dominique Straus-Kahn, who said he took the threat of a currency war "very seriously" and would do all he could to prevent one.

In an interview with Le Monde newspaper ahead of the annual IMF meeting in Washington opening on Friday, he said: "I take very seriously the threat of a currency war, even if it just a latent (threat).

"We have to prevent it; the IMF will put forward proposals to that end," he added.

Strauss-Kahn\’s comments and the EU statement come against a background of mounting concern that countries seeing their economies slow will try to devalue their currencies to boost their exports.

A competitive series of undercutting devaluations could mean a repetition of the \’beggar-thy-neighbour\’ policies of the 1930s, considered to have greatly exacerbated the Great Depression.

A key bone of contention is China, which the United States and Europe say keeps its currency deliberately undervalued to bolster its exports at their expense.

At 1215 GMT, the euro changed hands at 1.3970 dollars against 1.3928 dollars late in New York on Wednesday, at 115.10 yen (115.51), 0.8736 pounds (0.8764) and 1.3407 Swiss francs (1.3395).

The dollar stood at 82.39 yen (82.92) and 0.9596 Swiss francs (0.9614).

The pound was at 1.5989 dollars (1.5887), after briefly trading above 1.60 dollars for the first time since February.

On the London Bullion Market, the price of gold closed the morning session at 1,357.25 dollars an ounce, up from 1,346.50 dollars an ounce at the late fixing on Wednesday.

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