By David Oakley and Peter Garnham in London and Michael Mackenzie in New York
The dollar tumbled against most major currencies on Thursday, prompting warnings that the weakness of the world’s reserve currency could destabilise the global economy and push other countries into retaliatory devaluations to underwrite their exports.
Increasing expectations the Federal Reserve will pump more money into the US economy next month under a policy known as quantitative easing sent the dollar to new lows against the Chinese renminbi, Swiss franc and Australian dollar. It dropped to a 15-year low against the yen and an eight-month low against the euro.
The dollar index, which tracks a basket of currencies, reached its lowest level this year.
A senior European policy-maker, who asked not to be named, said a further aggressive round of monetary easing by the US Federal Reserve would be “irresponsible” as it made US exports more competitive at the expense of its rivals.
Simon Derrick, chief currency strategist for BNY Mellon, said: “In narrow terms, the US is winning the currency wars as a weaker dollar will help its economy, but it could damage the other big economic blocs of China, Japan and Europe.”
The dollar’s fall was given fresh impetus after the Monetary Authority of Singapore surprised the market when it tightened policy by widening the trading band for its currency, allowing it to appreciate. The move by the Singapore authorities, responding to fears over inflation, helped push up other Asian currencies.
He said one reason for exchange rate turmoil “is the stimulating monetary policy of some developed countries, above all the United States, which are trying to solve their structural problems in this way”.
Commodities, which are mostly traded in dollars, were boosted by the US currency’s slide. Copper hit a two-year high of $8,490 per tonne at one point, while gold surged to a record of $1,387 per troy ounce.
The twice-yearly US Treasury currency report, to be published on Friday, could ramp up the debate, although it is likely to stop short of accusing China of manipulating its currency.
However, turbulence was contained in the currency markets, as equities are benefiting from expectations of more QE. Investors hope that the fresh flood of money will find its way into stocks.
The QE factor and the strong start to the US earnings season propelled the FTSE All World Index to highs last seen around the time of the collapse of Lehman Brothers in September 2008. This index has risen 20 per cent since the start of July.
Robert Parkes, equity strategist at HSBC, said: “The equity bull run, which started in March last year, will go on.”
US inflation expectations for the next 10 years also continued to climb, reaching 2.09 per cent, up from 1.90 per cent in the past week.
The dollar fell to Rmb6.6493 against the Chinese renminbi, dropped to SFr0.9461 against the Swiss franc and fell to $0.9993 against the Australian dollar, just shy of parity. The Canadian dollar reached parity with the US currency, last seen in April. The US dollar fell below Y81 against the Japanese yen and tumbled to $1.4121 against the euro. The dollar index dropped nearly 1 per cent at one point to 76.259, its lowest since December.
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