Dollar's fall against euro, yen fuels fears of vicious cycle

The plummeting dollar broke through an important benchmark against the Japanese yen Thursday and hit another low against the euro, continuing an unnerving plunge that shows little sign of easing.

For the first time since 1995, the dollar traded for less than 100 yen while a euro now costs $1.56. The past six years, the dollar has lost 45% of its value against the European currency.

The weaker dollar makes U.S. exports less expensive for foreign buyers, but it boosts inflation and especially the price of oil. The greenback's malaise is now so bad that currency specialists are considering central bank intervention to halt the rout.

"The Europeans are already verbally intervening in the market. But they can't do this by themselves. They need the U.S. on board," says Stephen Jen, Morgan Stanley's global currency head.

European Central Bank chief Jean-Claude Trichet this week told a French magazine he was "concerned by excessive exchange-rate movements." President Bush late Wednesday caused a brief flurry when he said in an interview with the PBS program Nightly Business Report that he "absolutely" favors a stronger dollar. The comment seemed to go beyond long-standing policy backing an unspecified "strong" dollar.

But White House spokesman Tony Fratto said the president, who is scheduled to speak on the economy Friday before the Economic Club of New York, "did not change his position." The dollar is likely to come under additional pressure next week, with the Federal Reserve widely expected to cut interest rates at its Tuesday meeting.

The dollar's drop inflates world oil prices, which are quoted in dollars. When the dollar weakens, oil producers raise prices to keep revenue stable. Higher oil prices ignite inflation fears, causing foreign central banks to raise interest rates. That draws investment away from the USA, further depressing the dollar. "The danger is a vicious cycle between the dollar and oil prices," Jen said.

If the U.S. does intervene, the Federal Reserve Bank of New York would sell foreign currency reserves and buy dollars. Such action was more common in the 1990s than today. But Marc Chandler, currency head at Brown Bros. Harriman, said intervention at this point would likely fail. With the yield on two-year German notes roughly twice that of comparable U.S. securities, investor demand for the European currency will remain robust whatever the Fed does.

Chandler also said intervention won't be needed. The dollar has rebounded from its lows against the British pound and Canadian dollar, reached late last year, and likely will do the same against the euro and yen. "The dollar is in the process of turning," he said.