Dollar Continues Downward, Economy Shows More Weakness

The dollar dropped to a new low against the euro, today, reaching $1.3667 before recovering slightly to $1.3645. As the euro probed new territory in its quest to replace the greenback as the dominant currency of global trade, the exchange rate between the two currencies crossed a threshold at which currency options stop-loss orders came to bear. In the face of expected increases in U.S. interest rates, as already being experienced in recent Treasury auctions of government debt instruments, the continuing spiral of the dollar gives further indication that the American economy is expected to weaken substantially in the new year. All other things being equal, the rising U.S. interest rates should be making the dollar stronger, but that hasn't been the case so far.

More hard evidence of the weakening U.S. economy came today from the business sector, where the purchasing managers' index fell in December by more than 6%, to 61.2, exceeding analysts' expectations of a fall of less than 3.4% from the November index level of 65.2. With the U.S. dollar being so weak, the White House has been hoping for a noticeable upswing in business activity from world demand for increasingly cheap American exports, but the surprisingly large drop in the purchasing managers' index points to a broad-based and growing economic slump that will not be turned around by the exports sector.

The Bush Administration gave no indication today of concern about the new record low for the dollar or the dramatic drop in the purchasing managers' index.