The dollar plummeted on Wednesday against major and emerging market currencies as the prospect that US interest rates would remain at record lows encouraged investors to seek higher returns elsewhere. The euro hit a 15-month high above $1.45, while rising commodity prices and inflation sent the Canadian and Australian dollars to multi-year peaks.
Against major currencies, the greenback had its worst day in a month. Perhaps more crucially, traders said, the dollar extended a multi-week slide against large emerging currencies, hitting two-year lows against the Brazilian real and Mexican peso.
China also allowed the yuan to touch a record high, and a top central bank official called for more currency flexibility to ease inflation. Some analysts said this had markets betting that China would soon allow the yuan to rise even more quickly, which would likely put further pressure on the dollar.
"The only reason these countries would let their currencies strengthen is if they think their competitors for exports will also let their currencies go," said Douglas Borthwick, managing director of Faros Trading in Stamford, Connecticut. Borthwick said a "one-off revaluation of the yuan is not out of the question" and that he expects that China's currency, up 1 percent against the dollar this year and 4.5 percent since mid-2010, could appreciate another 6 percent by year end.
While China and others are tightening policy, markets expect the Federal Reserve to move slowly in soaking up all the dollars it has poured into the economy since 2008 to help the economy rebound from its worst recession since World War Two. US interest rate futures suggest the Fed won't raise its benchmark rate until the second quarter of 2012.
The European Central Bank hiked rates this month for the first time since 2008 and is expected to hike again. The contrast has helped boost the euro, which rose 1.2 percent on Wednesday to $1.4519, near an earlier 15-month high. The chase for yields also boosted the Australian dollar to an almost three-decade high at $1.0693. The currency benefits from Australia's 4.75 percent interest rate and its role as a large supplier of raw materials and commodities for the booming Chinese economy. The dollar also fell against the yen, down 0.3 percent to 82.36 yen.