Dollar Rises Against Euro in Europe Global Crisis

The euro and dollar dropped to fresh multi-year lows Friday as emerging markets continue to flush investments with heightened fears of global recession.

The euro fell to a new two-year low of $1.2496 overnight and nearly a six and a half year low of ¥113.79. The dollar dropped to a 13-year low of ¥90.87.

Now one would think that the dollar, viewed as the source of much of the world's commodity price inflation this decade, rising from long-term lows would be a cause for celebration.

Not exactly.

While the dollar's rally against most of the world's other major currencies does mean commodity price pressures are likely to continue to subside -- and that's good news for inflation, economists say -- the dollar is nevertheless rising for the wrong reason. Namely, an economic slowdown in Europe.

Euro, pound plunge on recession concerns

"It's not so much as the dollar is strengthening but that the euro and pound are weakening on the likelihood that central banks in Europe will have to cut interest rates more to deal with a recession," economist Peter Dawson said. "Europe is also seen as later in the business cycle than the U.S., which means the U.S. economy is likely to recover sooner, which also helps the dollar. "

The dollar took full advantage of that sentiment Wednesday, surging two cents to $1.2837 versus the euro and three cents to $1.6407 versus the British pound. The dollar also rose 1.6 cents to $1.1672 versus the Swiss franc.

However, the dollar fell one yen to 98.91 versus Japan's yen on the relatively stronger Japanese economy. Japan's banks have only modest exposure to toxic assets, one major reason why risk averse investors are seeking out the yen, Dawson said.

Dawson's outlook for the dollar heading into Q1 2009? "The dollar will continue to strengthen. The focus in Europe and the U.S. has to be on stimulating the economy, and that includes more interest rate cuts, along with fiscal stimulus, and other measures," he said. "The U.K. and European Union are not likely to complain about their currencies weakening. They'll probably secretly cheer it because it will make their exports cheaper."

Forex / Economic Analysis: Indeed, all dollar rallies are not alike. And as economist Dawson noted, the focus on all continents is on jump-starting economies. The euro and pound will fall, since the two currencies strengthened to extreme levels during the commodities boom -- one of the major, unsustainable imbalances that existed in the global economy.