Dollar plunges to fresh lows By Stephen Foley Published: 11 July 2007 The dollar has plunged to its lowest level ever against the euro amid evidence that the American housing market slowdown may be leaching into other areas of the economy. And sterling also hit a fresh 26-year high against the US currency, with Â£1 at one point buying close to $2.03. The dollar's decline came amid warnings of worsening conditions in the housing market. The rating agency Standard & Poor's predicted more defaults among low-income borrowers who have taken out so-called "sub-prime" mortgages, while the biggest home improvement chain, Home Depot, issued its second profit warning in two months. The number of homes being built in the US is at a 10-year low and tumbling prices in many parts of the country have discouraged people from moving. "We look at the overall market and say there's still a correction that lies ahead of us," Home Depot's chief executive Frank Blake said, adding that he expected "continued headwinds through 2007 and probably some into 2008 as well". S&P warned it may downgrade the creditworthiness rating of $12bn (Â£5.9bn) of bonds backed by sub-prime mortgages, and of other credit investments which are in turn backed by those bonds. Those other investments, known as collateralised debt obligations (CDOs), are widely held by hedge funds and other investors across the US financial system. Also yesterday, Moody's downgraded $1.6bn of sub-prime mortgage-backed securities. US house prices will drop by 8 per cent between 2006 and 2008, S&P predicted, exceeding the record peak-to-trough drop of 6.5 per cent between 1991 and 1992, making investments backed by sub-prime loans issued in 2006 particularly vulnerable. The fallout from rising sub-prime mortgage defaults is therefore widening, and foreign investors continued to withdraw from related financial markets yesterday, adding to the downward pressure on the dollar. David Solin, a partner at Foreign Exchange Analytics Investors, said investors should expect less foreign investment from now on because of a "global rethink of the credit quality of buying highly leveraged, high-yielding debt instruments". By the close in the US, the euro was trading at $1.374, up just over a cent. The pound closed at $2.027, up 1.2 cents. Stocks were also hit, with the Dow Jones shedding just over 1 per cent to 13,501.7. The US economy has decelerated sharply this year, as weak housing markets and high petrol prices have undermined consumer spending power. Meanwhile, growth in the UK and eurozone has shot ahead and interest rate rises have been needed to keep inflation under control. The eurozone economy is expanding at its fastest pace for six years. Gregory Salvaggio, a vice-president for trading at Tempus Consulting in Washington, said there was a stark contrast with the situation in the US, where inflationary pressures are tempered by the weakness of the housing market, so that the Federal Reserve is holding rates steady. "The ECB is going to hike rates at least two times more this year and US bond yields are falling, giving no incentive for large global investors to hold dollars," he said. Traders had been nervous before a lunchtime speech by Ben Bernanke, the chairman of the Federal Reserve, to the National Bureau of Economic Research, in which he was due to talk about inflation. Any suggestion the Fed might view price pressures as rising would have lifted interest rate expectations and given the stock market a jolt, but would have supported the dollar. In the end, a more doveish tone left traders free to keep selling the dollar.