The dollar extended its rally on Friday, hitting a nearly 2-year high against the pound and gaining further against the euro, amid troubling signs about the global economy.
The dollar has soared against a number of currencies over the past month, most notably the euro. The 15-nation currency slid to $1.4713 in New York from $1.4803 late Thursday. It has fallen more than 13 cents from its high of $1.6038 set on July 15.
The British currency retreated to its lowest level since October 2006, sinking to $1.8629 from $1.8685 the previous session.
The dollar also climbed against the Japanese yen, rising to ¥110.49 from ¥109.77 late Thursday.
The dollar’s newfound strength had a ripple effect across commodity markets as well, as the price of gold and oil declined in Friday trading.
The dollar has climbed in recent weeks as the economic outlook outside the United States has worsened.
Figures published by the European Union Thursday revealed that the eurozone economy contracted by 0.2% in the April-June period, raising recession fears.
Earlier this week, the United Kingdom said unemployment is on the rise and inflation will continue to soar to 5%. As a result, the government hinted that interest rates may have to be lowered to prevent the country from entering a recession.
The European Central Bank and Bank of England both decided to hold interest rates steady last week to support economic growth, instead of raising them to combat inflation. And the latest figures suggest that rate cuts could be coming sooner rather than later.
At the same time, the annual inflation rate in the U.S. surged to 5.6% in July - its highest in 17 years. Rising inflation could prompt the Federal Reserve to start raising rates interest rates.
A combination of rate cuts in Europe and a rate hike by the Fed could help strengthen the dollar further. Rate hikes in the U.S. usually boost the dollar since higher rates increase returns on dollar-based assets.
Some analysts have recently speculated that the dollar rally could have some legs. In a research note, Goldman Sachs analysts led by Thomas Stolper said the lows the dollar hit earlier this year “are almost certainly behind us.”
Another surge in oil prices, a decline in U.S. exports or increasing signs of economic weakness in the American economy could derail the dollar’s rebound, Goldman Sachs analysts said. For now, however, they expect the euro to fall to $1.45 against the dollar over the next three months, and $1.40 a year from now.
