The Dollar slumped on Thursday, hitting its lowest level against the Euro in nearly three weeks, as investors reduced their expectations for a Federal Reserve interest rate rise this year. As US stocks slumped, the JPY and CHF gained on renewed jitters about the US banking sector and the surge in oil prices to another record high. Investors on Thursday unwound risky trades funded by these low-yielding currencies.
While the Federal Reserve on Wednesday said inflation risks had increased, it did not use language that convinced markets a rate rise was likely at its next policy meeting in August. In contrast, the ECB has repeatedly said it may lift interest rates in July to fight inflation. That helped push the Euro near a three-week high at 1.5768. The US central bank's move to leave interest rates unchanged on Wednesday effectively ended one of its most aggressive rate-cutting campaigns, launched last September to curb economic fallout from the housing and credit crisis. With rising inflation expectations, many investors are worried that the Fed is falling behind the curve.
EurUsd ended up 0.62% to 1.5762. UsdChf dropped 1.2% to 1.0233, the lowest since June 9th. GbpUsd rose 0.65% to 1.9869, near an eight-week high of 1.9873. EurJpy also climbed to a record high at 169.47 before easing to 169.05. UsdJpy fell 0.94% to 106.85, a two-week low, as Goldman Sachs on Thursday urged investors to sell bank and automaker shares.
US financial stocks plummeted while shares of General Motors sank more than 10%. Fitch Ratings' downgrade of General Motors and Chrysler credit ratings also hit the Dollar, as did the Dow's drop to its lowest level in 21 months. Oil prices on Thursday shot up to a record above $140 a barrel.