The dollar fell to a new low point against the euro yesterday and oil prices surged to a record, suggesting that a weaker American economy would be accompanied by higher prices for energy and other imported products.
As of late yesterday, the euro traded in New York at $1.3908, up from $1.3832 late Tuesday; the European common currency has risen 5.4 percent against the dollar so far this year and about 1 percent this week.
Crude oil prices rose more than 2 percent on the New York Mercantile Exchange, settling at $79.91 a barrel, after briefly trading above $80 — a day after OPEC said that its members would increase production by a modest amount.
Taken together, these moves in the currency and commodities markets signaled more trouble for the American economy.
Stock trading was light yesterday, and most indexes were modestly lower. The Standard & Poor’s 500-stock index ended essentially flat, and the Dow Jones industrial average declined a little more than 0.1 percent. Nasdaq and smaller-capitalization stocks were lower. Treasuries were down slightly, and the yield on the 10-year note rose to 4.41 percent, from 4.37 percent on Tuesday.
Gold prices, little changed yesterday, have also surged in recent days as fears of an economic decline mounted and the dollar weakened. Gold futures are up 5.7 percent so far this month, to $714 an ounce in New York.
Though the dollar has been falling against other currencies for much of the year, it has weakened significantly since Friday, when government data showed that businesses reduced net employment by 4,000 in August and that job growth had been weaker in June and July than previously thought.
Investors widely expect the Federal Reserve to lower its benchmark short-term interest rate, now at 5.25 percent, when it meets on Tuesday. There is even talk of a cut as much as a half-point.
Ashraf Laidi, chief foreign currency analyst at CMC Markets in New York, commented, “The payroll report was seen as a macroeconomic justification.”
Currencies are influenced by many factors, chief among them expectations for interest rates and inflation. If rates were to fall in the United States and remain unchanged in Europe, as many investors are expecting, traders will probably bid up the exchange value of euros.
“The dollar is not in a great position,” said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Conn. “The confidence level is eroding in the face of the credit market crisis, which is very much subprime related and mortgage market related. And it is now complicated by the fact that the real economy is slowing.”
For much of the year, the dollar has also been falling against the British pound and the Canadian, Australian and New Zealand dollars. The Japanese yen is up about 4 percent against the dollar so far in 2007, though it has lost some ground in the last few days.
The weakening dollar has been a boon to exporters whose goods and services will become more competitive on the world market.
Exports have been among the brightest spots in the American economy this year, growing 11.4 percent in the first eight months from the corresponding period of 2006. By comparison, imports were up 4.6 percent.
The depreciating dollar has made imports more expensive. Energy commodities are expected to be chief among these.
Oil prices, already near records set two months ago, have surged anew. The decision on Tuesday by the Organization of the Petroleum Exporting Countries to increase production by 500,000 barrels a day, a relatively small quantity when compared with total production, appeared to make little difference.
Yesterday, prices were also reacting to a government report that showed that crude oil inventories fell in the United States by 2.1 percent last week.
More broadly and in the longer term, many analysts say that oil prices are poised to go higher because global demand for energy, led by China and India, is growing far faster than overall production, especially among oil producers that are not members of OPEC.
“The combination of robust long-term demand growth and lagging non-OPEC supply suggests that strong support for oil prices is set to remain a feature of the markets beyond 2010,” Adam Sieminski, an analyst at Deutsche Bank, wrote in a research note.
Those higher prices, along with the increase in the prices of other imports, will provide another source of worry for the American economy and consumers. It could also complicate the Fed’s task, said Dustin Reid, a senior currency strategist at ABN Amro in Chicago. If inflation surges, policy makers would have a harder time justifying a big or prolonged series of rate cuts.
“At some point, you are going to have the potential of importing inflation from around the globe,” Mr. Reid said. “And that’s likely to keep the Fed on guard.”
