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Dollar surges vs Canadian dollar, euro, pound
(Associated Press WorldStream Via Acquire Media NewsEdge) NEW YORK_The dollar surged to multi-year highs against the Canadian dollar, British pound and 15-nation euro Wednesday on anxieties about the deteriorating economies overseas and growing expectations that central banks will cut interest rates.
The euro traded at $1.2866 in late afternoon New York trading, down from $1.3133 it bought the day before, as the euro zone exhibits more and more signs of a deep recession. Earlier, the currency bottomed at $1.2736, its lowest point since November 2006.
The British pound slumped more than 6 cents to its lowest level in five years after Bank of England governor Mervyn King hinted at further interest rate cuts to come and warned that the British economy is now likely in recession. The pound slid to $1.6337 from $1.6946, after hitting $1.6138 earlier in the session _ its lowest point since September 2003.
As recently as July, the pound was trading above $2 before lower British interest rate expectations fueled the sharp decline. Around that same time, the euro was trading above $1.60.
Most bank watchers think that the Bank of England will reduce rates another half percentage point at its November meeting, followed by further cuts in the months to come, possibly to as low as 2.50 percent by the middle of next year.
While the Bank of England and the European Central Bank have plenty of room to reduce borrowing costs from the current 4.50 percent and 3.75 percent, respectively, the U.S. Federal Reserve, for example, has much less because its base rate stands at 1.50 percent.
Cutting interest rates can prompt economic growth by encouraging lending but it can also undercut a currency's value on foreign exchange markets. Lower interest rates can prompt investors to transfer funds to currencies with higher interest rates, where they can earn higher returns.
"There are expectations that interest rates in Europe and abroad will be cut more aggressively than U.S. interest rates in the near term," said David Gilmore of Foreign Exchange Analytics in Essex, Connecticut.
In other trading Wednesday, the greenback strengthened to 1.2521 Canadian dollars from 1.2136 Canadian dollars. In later trding, the dollar surged to 1.2584 Canadian dollars, its highest level since June 2005.
On Tuesday, the Bank of Canada cut interest rates by a quarter-point to 2.25 percent. It was the first central bank to cut interest rates since a coordinated half-point rate cut by six other central banks earlier this month. The bank signaled it may cut rates again at its next meeting in December.
The dollar has seen support from "safe-haven" buying as investors rush to snap up short-term government debt and sell off positions in emerging-market currencies that they see as less stable, Gilmore said.
"The global deleveraging of markets is forcing a run into the yen and the dollar, which are arguably the two cheap funding currencies from the credit boom," Gilmore said. "I'd be hesitant, however, to assert that somehow the strength of the dollar reflects a global surge in confidence in the U.S. economy and U.S. markets. This is a rally in the U.S. currency that is a sign of stress, not a sign of relief."
The Fed said Wednesday it will boost the interest rate paid to commercial banks on excess reserves, but investors shifted their focus to worrisome corporate profit forecasts that are raising fears of a deep economic slowdown.
In other late New York trading, the dollar fell to 97.97 Japanese yen from 100.79 yen, but rose to 1.1599 Swiss francs from 1.1507 Swiss francs.
Copyright ? 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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